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Information Environment and the Investment Decisions of Multinational Corporations

51 Pages Posted: 6 Oct 2011 Last revised: 29 Mar 2014

Nemit Shroff

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Gwen Yu

Harvard Business School

Date Written: September 25, 2013

Abstract

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

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

Nemit Shroff (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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E62-679
Cambridge, MA MA 02142
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6173240805 (Phone)

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=51407&co_list=F

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

Gwen Yu

Harvard Business School ( email )

Soldiers Field Road
Morgan 383
Boston, MA 02163
United States

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