Fire-Sale FDI

48 Pages Posted: 27 May 2008

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: May 2007


Capital flight associated with the onset of a financial crisis in a country is often accompanied by an inflow of capital associated with foreign direct investment (FDI). Our paper provides a theoretical framework for this puzzle, and draws wider conclusions on the welfare effects of foreign takeovers. When fundamentals deteriorate, the return that can be pledged to portfolio investors is limited by the incentive constraints of the managers. Only with direct control by investors can the surplus in the project be unlocked. It is precisely during crises that there is the conjunction of the loss of control by incumbent domestic managers, and the lack of domestic capital to take over failing firms. Foreign investors can take over failing firms and capture the surplus, even though they value the assets less. Our theory is consistent with FDI inflows during financial crises being associated with the acquisition of stakes that grant control, rather than simply being acquisitions of cashflow stakes, and is also consistent with the subsequent 'flipping' of the FDI assets, where the asset is sold to investors with higher valuations once the crisis abates.

Keywords: capital flight, FDI flows, financial crises, fire sales, foreign takeovers

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

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Shin, Hyun Song and Yorulmazer, Tanju, Fire-Sale FDI (May 2007). CEPR Discussion Paper No. DP6319, Available at SSRN:

Viral V. Acharya (Contact Author)

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

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)


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

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002


Tanju Yorulmazer

Koc University ( email )

Rumeli Feneri Yolu
Sariyer, Istanbul, 34450


Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics