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  • January 2009
  • Article
  • Review of Financial Studies

Multinationals as Arbitrageurs? The Effect of Stock Market Valuations on Foreign Direct Investment

By: Malcolm Baker, C. Fritz Foley and Jeffrey Wurgler
  • Format:Print
  • | Pages:33
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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.

Keywords

Multinational Firms and Management; Financial Markets; Foreign Direct Investment; Valuation; Capital Markets; Cross-Cultural and Cross-Border Issues; Cost; Forecasting and Prediction; Capital; Stocks; Integration

Citation

Baker, Malcolm, C. Fritz Foley, and Jeffrey Wurgler. "Multinationals as Arbitrageurs? The Effect of Stock Market Valuations on Foreign Direct Investment." Review of Financial Studies 22, no. 1 (January 2009): 337–369.
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About The Authors

Malcolm P. Baker

Finance
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C. Fritz Foley

Finance
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