Download this Paper Open PDF in Browser

Fire-Sale FDI

45 Pages Posted: 20 Mar 2007 Last revised: 11 Nov 2010

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

Tanju Yorulmazer

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

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2009

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. 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 failed firms' 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 foreign firms, including inefficient ones, at fire-sale prices. Such fire-sale FDI is associated with a flipping of acquired firms back to domestic owners once the crisis abates. These features of fire-sale FDI find empirical support.

Keywords: Fire sales, Capital flight, FDI flows, Financial crises, Foreign takeovers

JEL Classification: G21, G28, G32, E58, D61

Suggested Citation

Acharya, Viral V. and Shin, Hyun Song and Yorulmazer, Tanju, Fire-Sale FDI (January 1, 2009). AFA 2008 New Orleans Meetings Paper; EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=972297 or http://dx.doi.org/10.2139/ssrn.972297

Viral V. Acharya (Contact Author)

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

44 West 4th Street
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)

77 Bastwick Street
London, EC1V 3PZ
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 ( 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

Paper statistics

Downloads
316
Rank
51,613
Abstract Views
2,006