Abstract

http://ssrn.com/abstract=556127
 
 

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Multinationals as Arbitrageurs: The Effect of Stock Market Valuations on Foreign Direct Investment


Malcolm P. Baker


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

C. Fritz Foley


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

Jeffrey Wurgler


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

May 2004


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.

Number of Pages in PDF File: 63

Keywords: Corporate investment, inefficient markets, behavioral finance, foreign direct investment, international finance

JEL Classification: G31

working papers series





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Date posted: November 2, 2005 ; Last revised: August 12, 2008

Suggested Citation

Baker, Malcolm P. and Foley, C. Fritz and Wurgler, Jeffrey, Multinationals as Arbitrageurs: The Effect of Stock Market Valuations on Foreign Direct Investment (May 2004). Available at SSRN: http://ssrn.com/abstract=556127 or http://dx.doi.org/10.2139/ssrn.556127

Contact Information

Malcolm P. Baker (Contact Author)
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 Business School ( 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
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