What Drives Capital Flows? The Case of Cross-Border M&A Activity and Financial Deepening

Posted: 22 Nov 2004

See all articles by Julian di Giovanni

Julian di Giovanni

Federal Reserve Banks - Federal Reserve Bank of New York; Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE); CREI and Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR)

Abstract

What macroeconomic and financial variables play key roles in the foreign direct investment decision of firms? This question is addressed in this paper using a large panel data set of cross-border Merger & Acquisition (M&A) deals for the period 1990-1999. Various econometric specifications are built around the simple gravity model commonly used in the trade literature.

Interestingly, financial variables and other institutional factors seem to play a significant role in M&A flows. In particular the size of financial markets, as measured by the stock market capitalization to GDP ratio, has a strong positive association with domestic firms investing abroad. This result points to the importance of domestic financial conditions in stimulating international investment during the boom years of 1990s, and accords with the significant drop in cross-border M&As in recent years.

Keywords: Mergers & Acquisitions, Cross-border, Capital flows, Financial deepening

JEL Classification: F21, F23, G34

Suggested Citation

di Giovanni, Julian, What Drives Capital Flows? The Case of Cross-Border M&A Activity and Financial Deepening. Available at SSRN: https://ssrn.com/abstract=622325

Julian Di Giovanni (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://julian.digiovanni.ca

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Barcelona
Spain

HOME PAGE: http://julian.digiovanni.ca

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

HOME PAGE: http://julian.digiovanni.ca

CREI and Universitat Pompeu Fabra ( email )

HOME PAGE: http://julian.digiovanni.ca

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://julian.digiovanni.ca

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