RFS Advance Access originally published online on October 8, 2008
Review of Financial Studies 2009 22(8):3245-3285; doi:10.1093/rfs/hhn089
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Do Foreigners Invest Less in Poorly Governed Firms?
Graduate School of Business, University of Chicago, National Bureau of Economic Research
David Eccles School of Business, University of Utah
Darden Graduate School of Business, University of Virginia, National Bureau of Economic Research
Send correspondence to Karl V. Lins, David Eccles School of Business, University of Utah, UT, 84103; telephone: 801-585-3171; fax: 801-581-3956; E-mail: finkvl{at}business.utah.edu.
JEL Classification: G11, G15, G32, G34
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Abstract |
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As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from twenty-nine countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are conducive to governance problems. This effect is particularly pronounced when earnings are opaque, indicating that information asymmetry and monitoring costs faced by foreign investors likely drive the results.
We thank Jillian Faucette, Sara Holland, Ivalina Kalcheva, Grant Long, and Alex Rothenberg for valuable research assistance. We are grateful for helpful comments from Anup Agrawal, Robert Bushman, Alexander Dyck, Robert Heinkel, Dale Henderson, Helena Isidro, Andrew Karolyi, Leora Klapper, Mike Lemmon, Darius Miller, Toby Moskowitz, René Stulz, Rohan Williamson, Luigi Zingales, and participants at the 2004 NYSE Conference on Global Equity Markets, the Tenth Annual Assurant/Georgia Tech International Finance Conference, the 2005 Shanghai Conference on Corporate Governance in Asia and China, the 2005 Maryland Finance Symposium, the 2005 Bank of Canada Workshop at UBC, the 2006 Darden/World Bank Emerging Markets Conference, the 2006 Corporate Governance and Capital Markets Conference sponsored by CEMAF and ISCTE in Lisbon, the 2007 Wharton Impact Conference on International Governance, the 2007 NBER Corporate Governance Workshop, and seminars at Indiana University, Ohio State University, the University of North Carolina at Chapel Hill, and the University of Oklahoma. The statistical analysis of security-level data on U.S. investors’ holdings reported in this study was conducted at the International Finance Division of the Board of Governors of the Federal Reserve System under arrangements that maintained legal confidentiality requirements. The views in this article are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.