Do Foreigners Invest Less in Poorly Governed Firms?
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network
Karl V. Lins
University of Utah - Department of Finance
Francis E. Warnock
University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)
Review of Financial Studies, 2008
As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from 29 countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are conducive to governance problems. This effect is particularly pronounced when earnings are opaque, indicating that information asymmetry and monitoring costs faced by foreign investors likely drive the results.
Keywords: Corporate governance, Firm valuation, Foreign investment, Ownership structure, Information flow, Earnings management, Shareholder base, Emerging markets, Home bias
JEL Classification: D82, F30, G14, G15, G32, G34, K22, M41
Date posted: March 19, 2008