Journal article
Politics, instability, and composition of international investment flows
Journal of corporate finance (Amsterdam, Netherlands), Vol.30, pp.299-324
02/2015
DOI: 10.1016/j.jcorpfin.2014.12.013
Abstract
We analyze the role of political instability for the composition of foreign investment, whether it takes the form of a majority- or minority-owned investment. We focus on the instability generated by the change of the party in power rather than on the risk of change of political regime or expropriation risk associated with this change. In majority-owned establishments, a foreign investor retains the control and enjoys fewer agency problems, while for minority-owned investments or joint ventures domestic partners of a foreign investor can lobby the government for preferential arrangements, such as firm-specific tax breaks. Political instability decreases the payoff of political connections in the future and decreases the attractiveness of minority-owned investments. The implications of our model are supported by empirical tests.
•We model and test a new political theory of foreign equity flows composition.•Majority-ownership minimizes agency problems.•With minority-ownership domestic partners obtain preferential treatment.•Political instability depletes the value of having a domestic partner.•We show that political instability reduces attractiveness of minority-ownership.
Details
- Title: Subtitle
- Politics, instability, and composition of international investment flows
- Creators
- Art Durnev - University of IowaRuben Enikolopov - ICREA — Institute of Political Economy and Governance, Barcelona, SpainMaria Petrova - ICREA — Institute of Political Economy and Governance, Barcelona, SpainVeronica Santarosa - University of Michigan–Ann Arbor
- Resource Type
- Journal article
- Publication Details
- Journal of corporate finance (Amsterdam, Netherlands), Vol.30, pp.299-324
- Publisher
- Elsevier B.V
- DOI
- 10.1016/j.jcorpfin.2014.12.013
- ISSN
- 0929-1199
- eISSN
- 1872-6313
- Grant note
- DOI: 10.13039/501100003443, name: Ministry of Education and Science of the Russian Federation
- Language
- English
- Date published
- 02/2015
- Academic Unit
- Finance
- Record Identifier
- 9984380381702771
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