Stock Market Valuations and Foreign Direct Investment
42 Pages Posted: 4 Nov 2008
There are 7 versions of this paper
Multinationals as Arbitrageurs: The Effect of Stock Market Valuations on Foreign Direct Investment
Stock Market Valuations and Foreign Direct Investment
The Stock Market and Investment: Evidence from FDI Flows
The Stock Market and Investment: Evidence from FDI Flows
Multinationals as Arbitrageurs: The Effect of Valuations on Foreign Direct Investment
Multinationals as Arbitrageurs: The Effect of Stock Market Valuations on Foreign Direct Investment
Multinationals as Arbitrageurs: The Effect of Stock Market Valuations on Foreign Direct Investment
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.
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