Fire-Sale FDI

Finance

IFA Working Paper

2007

Financial crises in countries are often accompanied by an outflow of foreign portfolio investment and an inflow of foreiggn 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. Direct ownership can circumvent these 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.

Fire sales; Capital flight, FDI flows; Financial crises, Foreign takeovers

Institute of Finance and Accounting

FIN 465

IFA Working Paper

No