Do Foreigners Invest Less in Poorly Governed Firms?

Christian Leuz, Karl Lins and Francis Warnock

No 12222, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: As domestic sources of outside finance are limited in many countries around the world, it is important to understand the factors that influence whether foreign outside investors provide capital to a country's firms. This study examines whether and why investor concern about corporate governance results in fewer foreign holdings. We use a comprehensive set of foreign holdings by U.S. investors as a proxy for foreign investment and analyze a sample of 4,411 firms from 29 emerging market and developed economies. We find that foreigners invest significantly less in firms that are poorly governed, i.e., firms that have ownership structures that are more conducive to outside investor expropriation. Interestingly, this finding is not simply a matter of a country's economic development but appears to be directly related to a country's information rules and legal institutions. We therefore argue that information problems faced by foreign investors play an important role in this result. Supporting this explanation, we show that foreign investment is lower in firms that appear to engage in more earnings management.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-fin and nep-fmk
Note: CF IFM ITI
References: Add references at CitEc
Citations: View citations in EconPapers (27)

Published as Review of Financial Studies 2009 Vol 22, Issue 8: pp. 3245-3285
Published as Do Foreigners Invest Less in Poorly Governed Firms? , Christian Leuz, Karl V. Lins, Francis E. Warnock. in Corporate Governance , Weisbach. 2010

Downloads: (external link)
http://www.nber.org/papers/w12222.pdf (application/pdf)

Related works:
Chapter: Do Foreigners Invest Less in Poorly Governed Firms? (2010)
Journal Article: Do Foreigners Invest Less in Poorly Governed Firms? (2010)
Journal Article: Do Foreigners Invest Less in Poorly Governed Firms? (2009)
Working Paper: Do Foreigners Invest Less in Poorly Governed Firms? (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:12222

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w12222

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().