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Fire-sale FDI or business as usual?

Author

Listed:
  • Alquist, Ron
  • Mukherjee, Rahul
  • Tesar, Linda
Abstract
Motivated by a set of stylized facts, we develop a model of cross-border mergers and acquisitions (M&As) to study foreign direct investment (FDI) in emerging markets. We compare acquisitions undertaken during financial crises – so called fire-sale FDI – with acquisitions made during non-crisis periods to examine whether the outcomes differ in the ways predicted by the model. Foreign acquisitions are driven by two sources of value creation. First, acquisitions by a foreign firm relax the target's credit constraint (i.e., a liquidity motive). Second, acquisitions exploit operational synergies between the target and the acquirer (i.e., a synergistic motive). During crises credit conditions tighten in the target economy and the liquidity motive dominates. The model predicts that during crisis relative to non-crisis periods, (1) the likelihood of foreign acquisitions is higher; (2) the proportion of foreign acquisitions in the same industry is lower; (3) the average size of ownership stakes is lower; and (4) the duration of acquisitions is lower (i.e., acquisition stakes are more likely to be flipped). We find support for (1) but not for the other three predictions. The results thus suggest that foreign acquisitions in emerging markets do not differ in these important ways between crisis and normal periods.

Suggested Citation

  • Alquist, Ron & Mukherjee, Rahul & Tesar, Linda, 2016. "Fire-sale FDI or business as usual?," Journal of International Economics, Elsevier, vol. 98(C), pages 93-113.
    • Handle: RePEc:eee:inecon:v:98:y:2016:i:c:p:93-113
    DOI: 10.1016/j.jinteco.2015.09.003
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    More about this item

    Keywords

    Fire sales; Foreign direct investment; Cross-border mergers and acquisitions; Financial crises; Flipping;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G01 - Financial Economics - - General - - - Financial Crises
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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