Corruption, political risk, asset type and agency issues for UK firms investing in emerging markets

Research output: Contribution to conferencePaper

Abstract

In this paper we augment traditional international business (IB) approaches to research on foreign direct investment (FDI) by integrating finance theory, in particular agency theory, in order to investigate the shareholder wealth effect of 306 announcements of FDI in emerging markets (EM) by UK firms. We find UK firms experience a highly significant shareholder wealth gain. The greatest gains are for UK firms investing in EM with high political risk or corruption ratings. We show that the type of asset invested in, or acquired, has a bearing on the shareholder wealth effect. There is a significant interaction effect between the type of asset investment and corruption: investments involving the acquisition of physical assets in EM with a high corruption rating elicit the greatest gains. In terms of finance theory interaction we find results in support of the free cash flow (FCF) hypothesis. Furthermore, when we interact Tobin’s q and FCF with political risk and corruption, our results show that firms with low FCF generally experience a positive market reaction and that the results are stronger for firms with good investment opportunities (high Tobin’s q) when investing in EM with a high political risk or corruption rating.
Original languageEnglish
Publication statusPublished - 17 Apr 2010
EventEastern Finance Association Annual Meeting 2010 - Miami, United States
Duration: 14 Apr 201017 Apr 2010

Conference

ConferenceEastern Finance Association Annual Meeting 2010
CountryUnited States
CityMiami
Period14/04/1017/04/10

Keywords

  • corruption
  • political risk
  • foreign direct investment

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