Fire-Sale FDI

Acharya, V V, Shin, H S and Yorulmazer, T (2007) Fire-Sale FDI. Working Paper. London Business School IFA Working Paper.

Abstract

Ficial crises in countries are often accompanied by an outflow of foreign portfolio investment and an inflow of foreiggn direct investment (FDI). We provide an agencytheoretic framework that explains this phenomenon. During crises, agency problems affecting domestic firms are exacerbated, and, in turn, external ficing constrained. Direct ownership can circumvent these problems, but during crises, efficient owners (e.g. other domestic firms) face similar ficing constraints. The result is a transfer of ownership to foreign firms, including inefficient ones, at firesale prices. Such firesale FDI is associated with a flipping of acquired firms back to domestic owners once the crisis abates.