Fire-Sale FDI and Liquidity Crises

45 Pages Posted: 29 Aug 2002

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Gita Gopinath

International Monetary Fund (IMF); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 12, 2002


In placing capital market imperfections at the center of emerging market crises, the theoretical literature has associated a liquidity crisis with low foreign investment and the exit of investors from the crisis economy. However, a liquidity crisis is equally consistent with an inflow of foreign capital in the form of mergers and acquisitions (M&A). To support this hypothesis, we use a firm-level dataset to show that foreign acquisitions increased by 88% in East Asia between 1996 and 1998, while intra-national merger activity declined. Firm liquidity plays a significant and sizeable role in explaining both the increase in foreign acquisitions and the decline in the price of acquisitions during the crisis. This effect is most prominent in the tradable sectors and represents a significant departure from the pattern of M&A observed both before and after the crisis. Quantitatively, the observed decline in liquidity can explain nearly 30% of the increase in foreign acquisition activity in the tradable sectors. We argue that the nature of M&A activity during the crisis contradicts productivity-based explanations of the East Asian crisis.

Keywords: FDI, liquidity crises, fire-sale

JEL Classification: F3

Suggested Citation

Aguiar, Mark and Gopinath, Gita, Fire-Sale FDI and Liquidity Crises (August 12, 2002). Available at SSRN: or

Mark Aguiar

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Gita Gopinath (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
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Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
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National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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