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Journal of Corporate Finance Vol. 30 2015

Politics, instability, and composition of international investment flows

Art Durnev1,2; Ruben Enikolopov; Maria Petrova3,4,5,6,7; Veronica Santarosa8

1 University of Iowa · 2 City University of Seattle · 3 Institut de Política Econòmica i Governança · 4 Institució Catalana de Recerca i Estudis Avançats · 5 Universitat Pompeu Fabra · 6 Barcelona School of Economics · 7 New Economic School · 8 University of Michigan–Ann Arbor

Abstract

We analyze the role of political instability for the composition of foreign investment, whether it takes the form of a majority- or minority-owned investment. We focus on the instability generated by the change of the party in power rather than on the risk of change of political regime or expropriation risk associated with this change. In majority-owned establishments, a foreign investor retains the control and enjoys fewer agency problems, while for minority-owned investments or joint ventures domestic partners of a foreign investor can lobby the government for preferential arrangements, such as firm-specific tax breaks. Political instability decreases the payoff of political connections in the future and decreases the attractiveness of minority-owned investments. The implications of our model are supported by empirical tests.

DOI
10.1016/j.jcorpfin.2014.12.013
Volume
30
Pages
299-324
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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