51 Pages Posted: 6 Oct 2011 Last revised: 29 Mar 2014
Date Written: September 25, 2013
This paper examines how the external information environment in which foreign subsidiaries operate affects the investment decisions of multinational corporations (MNCs). We hypothesize and find that the investment decisions of foreign subsidiaries in country-industries with more transparent information environments are more responsive to local growth opportunities than are those of foreign subsidiaries in country-industries with less transparent information environments. Further, this effect is larger when (i) there are greater cross-border frictions between the parent and subsidiary, and (ii) the parents are relatively more involved in their subsidiaries’ investment decision-making process. Our results suggest that the external information environment helps mitigate the agency problems that arise when firms expand their operations across borders. This paper contributes to the literature by showing that the external information environment helps MNCs mitigate information frictions within the firm.
Keywords: Corporate Investment, Investment Efficiency, Information Environment, Information Quality, Information Asymmetry, Multinational Corporations, MNCs, Financial Reporting Quality, Transparency
JEL Classification: D83, D9, F3, G30, G31, H25, H26, M41, O4
Suggested Citation: Suggested Citation
Shroff, Nemit and Verdi, Rodrigo S. and Yu, Gwen, Information Environment and the Investment Decisions of Multinational Corporations (September 25, 2013). The Accounting Review, Vol. 89, No. 2, pp. 759-790, March 2014; MIT Sloan Research Paper No. 4942-11. Available at SSRN: https://ssrn.com/abstract=1939494 or http://dx.doi.org/10.2139/ssrn.1939494
By Nemit Shroff