Cross-Border Investment: Information Asymmetry, Imperfect Capital Markets, And Heterogeneous Firms

Abstract

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.