Do Foreigners Invest Less in Poorly Governed Firms?

55 Pages Posted: 25 May 2006 Last revised: 25 Nov 2022

See all articles by Christian Leuz

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Leibniz Institute SAFE; CESifo Research Network; Center for Financial Studies (CFS)

Karl V. Lins

University of Utah - Department of Finance

Francis E. Warnock

University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: May 2006

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.

Suggested Citation

Leuz, Christian and Lins, Karl V. and Warnock, Francis E., Do Foreigners Invest Less in Poorly Governed Firms? (May 2006). NBER Working Paper No. w12222, Available at SSRN: https://ssrn.com/abstract=902574

Christian Leuz (Contact Author)

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Karl V. Lins

University of Utah - Department of Finance ( email )

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Francis E. Warnock

University of Virginia - Darden Business School ( email )

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