Fire-Sale FDI

53 Pages Posted: 8 Feb 2010 Last revised: 10 Sep 2013

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Hyun Song Shin

Bank for International Settlements (BIS)

Tanju Yorulmazer

University of Amsterdam - Faculty of Economics and Business (FEB)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2010

Abstract

Financial crises are often accompanied by an outflow of foreign portfolio investment and an inflow of foreign direct investment(FDI). We provide an agency-theoretic framework that explains this phenomenon. We show that during crises, agency problems affecting domestic firms are exacerbated, and, in turn, external financing constrained. Transfer of control in the form of direct ownership of failedfirms' assets by alternate users can circumvent agency problems, but during crises, efficient owners (e.g.other domestic firms) face similar financing constraints. The result is a transfer of ownership to foreignfirms, including inefficient ones, at fire-sale prices. Suchre-sale FDI is associated with a flipping of acquired firms back to domestic owners once the crisis abates. These features of re-sale FDI find empirical support.

Suggested Citation

Acharya, Viral V. and Shin, Hyun Song and Yorulmazer, Tanju, Fire-Sale FDI (January 2010). NYU Working Paper No. 2451/29541. Available at SSRN: https://ssrn.com/abstract=1548817

Viral V. Acharya (Contact Author)

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

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

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

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

Tanju Yorulmazer

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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