Review of Financial Studies Vol. 22 No. 1 2009
Multinationals as Arbitrageurs: The Effect of Stock Market Valuations on Foreign Direct Investment
Abstract
[Empirical evidence of imperfect integration across world capital markets suggests a role for cross-border arbitrage by multinationals. Consistent with multinational arbitrage as a determinant of foreign direct investment (FDI) patterns, we find that FDI flows increase sharply with source-country stock market valuations--particularly the component of valuations that is predicted to revert the next year, and particularly in the presence of capital account restrictions that limit other mechanisms of cross-country arbitrage. The results suggest the existence of a cheap financial capital channel in which FDI flows reflect, in part, the use of relatively low-cost capital available to overvalued parents in the source country.]
- Volume
- 22
- Issue
- 1
- Pages
- 337-369
- Sources
- bibtex:phds-export.bib