Article | Accounting Review | Forthcoming

Information Environment and the Investment Decisions of Multinational Corporations

by Nemit O. Shroff, Rodrigo S. Verdi and Gwen Yu

Abstract

This paper examines how the external information environment in which foreign subsidiaries operate affects the investment decisions of multinational corporations (MNCs). We hypothesize and find that the investment decisions of foreign subsidiaries in country-industries with more transparent information environments are more responsive to local growth opportunities than are those of foreign subsidiaries in country-industries with less transparent information environments. Further, this effect is larger when (i) there are greater cross-border frictions between the parent and subsidiary, and (ii) the parents are relatively more involved in their subsidiaries' investment decision-making process. Our results suggest that the external information environment helps mitigate the agency problems that arise when firms expand their operations across borders. This paper contributes to the literature by showing that the external information environment helps MNCs mitigate information frictions within the firm.

Keywords: investment; capital budgeting; Multinational firms; Cross-border frictions; Agency frictions; transparency; financial reporting quality; information quality; Information; Multinational Firms and Management; Decision Choices and Conditions; Investment;

Citation:

Shroff, Nemit O., Rodrigo S. Verdi, and Gwen Yu. "Information Environment and the Investment Decisions of Multinational Corporations." Accounting Review (forthcoming). (Revised July 2013. Forthcoming March 2014.)