The stock market and investment
Subtitle: Evidence from FDI flows
By: Malcolm Baker, C. Fritz Foley, Jeffrey Wurgler.
Contributors: Foley, C. Fritz.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10559; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10559.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Securities.; Stock exchanges.; Investments, Foreign.
Description: "Foreign direct investment offers a rich laboratory in which to study the broader economic effects of securities market mispricing.  We outline and test two mispricing-based theories of FDI.  The cheap assets' or fire-sale theory views FDI inflows as the purchase of undervalued host country assets, while the cheap capital' theory views FDI outflows as a natural use of the relatively lowcost capital available to overvalued firms in the source country.  The empirical results support the cheap capital view: FDI flows are unrelated to host country stock market valuations, as measured by the aggregate market-to-book-value ratio, but are strongly positively related to source country valuations and negatively related to future source country stock returns.  The latter effects are most pronounced in the presence of capital account restrictions, suggesting that such restrictions limit cross-country arbitrage and thereby increase the potential for mispricing-driven FDI"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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