Viral V. Acharya
New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Hyun Song Shin
Bank for International Settlements; Princeton University - Department of Economics
Federal Reserve Bank of New York
January 1, 2009
AFA 2008 New Orleans Meetings Paper
EFA 2008 Athens Meetings Paper
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.
Number of Pages in PDF File: 45
Keywords: Fire sales, Capital flight, FDI flows, Financial crises, Foreign takeovers
JEL Classification: G21, G28, G32, E58, D61
Date posted: March 20, 2007 ; Last revised: November 11, 2010
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