Investability and Firm Value
35 Pages Posted: 11 Sep 2008
Date Written: September 3, 2008
We study how investability, or openness to foreign equity investors, affects firm value in a sample of over 1,400 firms from 26 emerging markets. We find that, on average, investability is associated with a 9% valuation premium (as measured by Tobin's q). However, in firm-fixed effects regressions this valuation premium disappears, suggesting that investability does not have a causal effect on firm value. Analysis of the components of Tobin's q shows that firms that become investable experience significant increases in both market values and physical investment. These effects are strongest for firms that face country-level or firm-level financial constraints prior to becoming investable.
Keywords: Financial liberalization, Investability, Foreign investors, Tobin's q
JEL Classification: G15, F36
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