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Nonlinearities arise in international investment because of a pecking order in barriers. Some severe barriers render all others meaningless, and only when they are alleviated do other barriers become important. We show, using quantile regressions designed to model relations at more points than just the conditional mean, how various investment theories hold at different points in the distribution of bilateral cross-border equity holdings. Our results reconcile a number of findings in the literature by highlighting that datasets that focus on different points of the barriers (investment) distribution can naturally lead to different results.
Because of market failures, domestic investment resources are often insufficient to fully finance the public and private capital formation critical to global wealth preservation and growth. It is thus important to understand the factors that drive cross-border investments, including the potential fit between the objectives of international long-term investors and public policy objectives. This article reports the results of a survey of such investors. This research revealed that foreign policy factors were most likely to affect cross-border investment decisions; other influential factors included organizational issues. The survey also found a surprising gap between the responding funds' aspiration to be long-term investors and their apparent willingness and/or ability to implement long-term investment strategies. These findings highlight the importance of a facilitative policy environment for understanding the benefits of, and implementing, long-horizon cross-border investments.
My dissertation investigates issues concerning information asymmetry, imperfect capital markets, and their impact on foreign portfolio investment (FPI) and crossborder mergers and acquisitions (M & As). Chapter 1 studies how investors allocate their portfolio equity investment internationally. I develop a model to formalize the information signaling mechanism of foreign direct investment (FDI): When investors make FDI, due to their control and monitoring as insiders, they obtain the information about the returns on overseas subsidiaries and thereby extract the information about the returns on FPI. The extent to which FDI predicts the returns on FPI is referred to as the informativeness of FDI. I construct measures for the informativeness of FDI and find that FPI is more sensitive to FDI if FDI has a higher degree of informativeness. Chapter 2, coauthored with G. Andrew Karolyi, investigates how imperfect capital markets and exchange rates affect firms' asset sales worldwide. We show that the informational imperfection on the capital markets impacts entrepreneurs' odds to win bids through two channels: First, it decreases the maximum amount of loans that entrepreneurs obtain; second, it reduces the cutoff level of entrepreneurs' initial wealth below which they are credit rationed. We find that the cross-border asset sales between a country pair are negatively correlated with the financial development of the target country, while it is positively associated with that of the acquirer country. The depreciation of the target country currency is associated with a lower increase in the cross-border asset sales for a higher level of financial development of the target country. Chapter 3 explores how firms' heterogeneous characteristics, in particular their competitiveness on the product market and productivity affect their domestic and cross-border corporate asset transactions. I find that firms participate in the domestic and overseas corporate asset markets through endogenous self-selection. Specifically, firms with high competitiveness are more likely to buy assets on the overseas markets, and they are more likely to sell assets on the domestic market. Firms with high productivity are more likely to buy assets on both the domestic and overseas markets, and they are less likely to sell assets on the domestic market.
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