Multinationals as Arbitrageurs: The Effect of Stock Market Valuations on Foreign Direct Investment
Posted: 3 Jan 2009
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
Date Written: January 2009
Abstract
Empirical evidence of imperfect integration across world capital markets suggests a role for cross-border arbitrage by multinationals. Consistent with multinational arbitrage as a determinant of foreign direct investment (FDI) patterns, we find that FDI flows increase sharply with source-country stock market valuations-particularly the component of valuations that is predicted to revert the next year, and particularly in the presence of capital account restrictions that limit other mechanisms of cross-country arbitrage. The results suggest the existence of a cheap financial capital channel in which FDI flows reflect, in part, the use of relatively low-cost capital available to overvalued parents in the source country.
Keywords: F15, F21, F23, G31, G34
Suggested Citation: Suggested Citation