Do International Portfolio Investors Follow Firms' Foreign Investment Decisions?

47 Pages Posted: 2 Oct 2007

See all articles by Roberto A. De Santis

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics

Paul Ehling

BI - Norwegian Business School

Date Written: September 2007

Abstract

We analyze the interlinkages between foreign direct investment (FDI) and foreign portfolio investment (FPI) between Germany and the major economies. First, we show that Tobin's q helps explaining the variation of the growth rate of the stock of FDI. Second, we show that foreign and the home stock market returns explain the variation of the growth rate of the stock of FPI. Most importantly, we find that information about foreign fundamentals is revealed via direct investment. In other words, FDI transactions measured by fitted growth rates of the stock of FDI help explaining current growth rates of the stock of FPI. To our knowledge this observation is the first unambiguous evidence that international portfolio investors follow firms' expected foreign investment decisions.

Keywords: Foreign Direct Investment, Foreign Portfolio Investment, Tobin's q, Investor Heterogeneity, and Information Spillovers

JEL Classification: F21, F23, G11, G15

Suggested Citation

De Santis, Roberto A. and Ehling, Paul, Do International Portfolio Investors Follow Firms' Foreign Investment Decisions? (September 2007). ECB Working Paper No. 815. Available at SSRN: https://ssrn.com/abstract=1015266

Roberto A. De Santis (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Paul Ehling

BI - Norwegian Business School ( email )

N-0442 Oslo
Norway
+47 46410505 (Phone)

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