Fire-Sale FDI

45 Pages Posted: 20 Mar 2007 Last revised: 11 Nov 2010

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 1, 2009

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. 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 failed firms' 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 foreign firms, including inefficient ones, at fire-sale prices. Such fire-sale FDI is associated with a flipping of acquired firms back to domestic owners once the crisis abates. These features of fire-sale FDI find empirical support.

Keywords: Fire sales, Capital flight, FDI flows, Financial crises, Foreign takeovers

JEL Classification: G21, G28, G32, E58, D61

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Shin, Hyun Song and Yorulmazer, Tanju, Fire-Sale FDI (January 1, 2009). AFA 2008 New Orleans Meetings Paper, EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=972297 or http://dx.doi.org/10.2139/ssrn.972297

Viral V. Acharya (Contact Author)

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

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

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

Stern School of Business
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Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER) ( 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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