Fire-Sale FDI

53 Pages Posted: 8 Feb 2010 Last revised: 10 Sep 2013

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Hyun Song Shin

Bank for International Settlements (BIS)

Tanju Yorulmazer

Koc University

Multiple version iconThere are 3 versions of this paper

Date Written: January 2010

Abstract

Financial crises are often accompanied by an outflow of foreign portfolio investment and an inflow of foreign direct investment(FDI). We provide an agency-theoretic framework that explains this phenomenon. We show that during crises, agency problems affecting domestic firms are exacerbated, and, in turn, external financing constrained. Transfer of control in the form of direct ownership of failedfirms' assets by alternate users can circumvent agency problems, but during crises, efficient owners (e.g.other domestic firms) face similar financing constraints. The result is a transfer of ownership to foreignfirms, including inefficient ones, at fire-sale prices. Suchre-sale FDI is associated with a flipping of acquired firms back to domestic owners once the crisis abates. These features of re-sale FDI find empirical support.

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Shin, Hyun Song and Yorulmazer, Tanju, Fire-Sale FDI (January 2010). NYU Working Paper No. 2451/29541, Available at SSRN: https://ssrn.com/abstract=1548817

Viral V. Acharya (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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New York University (NYU) - Department of Finance ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Hyun Song Shin

Bank for International Settlements (BIS) ( email )

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HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

Tanju Yorulmazer

Koc University ( email )

Rumeli Feneri Yolu
Sariyer, Istanbul, 34450
Turkey

HOME PAGE: http://gsssh.ku.edu.tr/en/departments/economics/akademik-kadro/show/tyorulmazer/

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