Stock Market Valuations and Foreign Direct Investment

42 Pages Posted: 4 Nov 2008

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 7 versions of this paper

Date Written: December 2004

Abstract

We outline and test two theories of foreign direct investment based on capital market mispricing. The â¬Scheap assetsâ¬? or â¬Sfire-saleâ¬? theory considers FDI inflows as the purchase of undervalued host country assets, while the â¬Scheap financial capitalâ¬? theory views FDI outflows as a natural use of the relatively low-cost capital available to overvalued firms in the source country. The results are consistent with the cheap financial capital theory: FDI flows are unrelated to host country stock market valuations, as measured by the aggregate market-to-book-value ratio, but are strongly positively related to source country valuations and negatively related to future source country stock returns, especially when capital account restrictions limit cross-country arbitrage.

Suggested Citation

Baker, Malcolm P. and Foley, C. Fritz and Wurgler, Jeffrey A., Stock Market Valuations and Foreign Direct Investment (December 2004). NYU Working Paper No. SC-AM-04-05. Available at SSRN: https://ssrn.com/abstract=1295168

Malcolm P. Baker

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

C. Fritz Foley

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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