Stock Market Valuations and Foreign Direct Investment

42 Pages Posted: 4 Nov 2008

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 7 versions of this paper

Date Written: December 2004

Abstract

We outline and test two theories of foreign direct investment based on capital market mispricing. The â¬Scheap assetsâ¬? or â¬Sfire-saleâ¬? theory considers FDI inflows as the purchase of undervalued host country assets, while the â¬Scheap financial capitalâ¬? theory views FDI outflows as a natural use of the relatively low-cost capital available to overvalued firms in the source country. The results are consistent with the cheap financial capital theory: FDI flows are unrelated to host country stock market valuations, as measured by the aggregate market-to-book-value ratio, but are strongly positively related to source country valuations and negatively related to future source country stock returns, especially when capital account restrictions limit cross-country arbitrage.

Suggested Citation

Baker, Malcolm P. and Foley, C. Fritz and Wurgler, Jeffrey A., Stock Market Valuations and Foreign Direct Investment (December 2004). NYU Working Paper No. SC-AM-04-05, Available at SSRN: https://ssrn.com/abstract=1295168

Malcolm P. Baker

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

C. Fritz Foley

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
257
Abstract Views
1,812
Rank
15,355
PlumX Metrics