معامله مبتنی بر اطلاعات بین سرمایه گذاری مستقیم خارجی و سرمایه گذاری پرتفولیو خارجی
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|22679||2006||25 صفحه PDF||سفارش دهید||محاسبه نشده|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of International Economics, Volume 70, Issue 1, September 2006, Pages 271–295
The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI). FDI enables the owner to obtain refined information about the firm. This superiority, relative to FPI, comes with a cost: a firm owned by the FDI investor has a low resale price because of asymmetric information between the owner and potential buyers. The model can explain several stylized facts regarding foreign equity flows, such as the larger ratio of FDI to FPI inflows in developing countries relative to developed countries, and the greater volatility of FDI net inflows relative to FPI net inflows.
International equity flows are the main feature of the recent globalization of capital markets both in developing and in developed economies. These flows take two major forms: Foreign Direct Investments (FDI) and Foreign Portfolio Investments (FPI). An empirical regularity is that the share of FDI in total foreign equity flows is larger for developing countries than for developed countries.1 Regarding the second moments of foreign equity flows, it is known that the volatility of FDI net inflows is, in general, much smaller than that of FPI net inflows.2 Moreover, empirical analysis has established that the differences in volatility between FPI and FDI flows are much smaller for developed economies than for developing economies.3 Despite the empirical interest in foreign equity flows, very little work has been done on jointly explaining FDI and FPI in a rigorous theoretical framework. In this paper, we propose such a framework, and provide a model of a trade off between FDI and FPI, which is consistent with the empirical facts mentioned above. Our model highlights a key difference between the two types of investment: FDI investors, who take both ownership and control positions in the domestic firms, are in effect the managers of the firms under their control; whereas FPI investors, who gain ownership without control of domestic firms, must delegate decisions to managers, but limit their freedom to make decisions because the managers' agenda may not be always consistent with that of the owners. Consequently, due to an agency problem between managers and owners, portfolio investment projects are managed less efficiently than direct investment projects.4 To be more specific, direct investors, who act effectively as managers of their own projects, are more informed than portfolio investors regarding changes in the prospects of their projects. This information enables them to manage their projects more efficiently. This effect generates an advantage, with an added value in the capital markets, to direct investments relative to portfolio investments. There are, however, costs to direct investments. We specify two types of costs. The first type reflects the initial cost that an FDI investor has to incur in order to acquire the expertise to manage the project directly. This cost is exogenously given in the model. The second type, an information-based cost, is derived endogenously in the model. It results from the possibility that investors need to sell their investments before maturity because they face liquidity shocks. In such circumstances, the price they can get will be lower if they have more information on the economic fundamentals of the investment project. This is because when potential buyers know that the seller has more information, they may suspect that the sale results from bad information on the prospects of the investment, and will thus be willing to pay a lower price. Thus, if they invest directly, the investors bear the cost of getting a lower price if and when they are forced to sell the project before maturity. Our model, therefore, describes a key trade off between management efficiency and liquidity.5 Both sides of this trade off are driven by the effect of asymmetric information, which comes with control. When they invest directly, investors get more information about the fundamentals of the investment, and thereby can manage the project more efficiently, than their portfolio-investors counterparts. However, this also generates a “lemons” type problem when they try to sell the investment before maturity (Akerlof, 1970). Therefore, this superior information effect reduces the price they can get when they are forced to sell the project prematurely. This trade off between efficiency and liquidity has strong roots in existing empirical evidence. The idea that control increases efficiency and value of the firm, which constitutes one side of the trade off, is supported empirically by two recent papers in the international finance literature. The first paper – by Perez-Gonzalez (2005) – shows that after a foreign investor establishes a position that is greater than 50% of the firm's shares, the firm's productivity, computed using data on future earnings, improves. The second paper – by Chari, et al. (2005) – demonstrates the positive response in the stock market to the establishment of control (defined, again, as more than 50% ownership). Since having more than 50% ownership is the ultimate indication for control, these two papers provide clear evidence on the link between control and value, which is a basic premise of our paper. It should be noted, however, that large shareholders can achieve effective control in many cases by holding a block that is much smaller than 50% of the firm. This has been noted in the finance literature by Shleifer and Vishny (1986), Bolton and von Thadden (1998) and others. Going back to our basic premise, this implies that the value of the firm may increase with ownership concentration even when the controlling shareholder has a block that is smaller than 50%. Such evidence is provided by Wruck (1989) and by Hertzel and Smith (1993). This is much in line with our focus on the trade off between FDI and FPI, since many FDI investments exhibit blocks that are much smaller than 50%. The other side of the trade off – the idea that the sale of shares by control holders generates a larger price impact than a sale by other investors – can be supported by two strands in the finance literature. First, it has been shown that the sale of stocks by large blockholders has a bigger downward effect on the price than sales of stocks by other investors. For example, see: Mikkelson and Partch (1985), Holthausen et al. (1990), and Chan and Lakonishok (1995). Following the logic above, this result may well apply to the basic premise of our paper, as large blockholders probably have more control over the firms' management. Second, perhaps the best evidence on the price impact of sale in the presence of control can be obtained by looking at what happens when the firm sells its own shares. After all, the firm has ultimate control over its operations, and thus this type of transaction is expected to suffer most from asymmetric information between the seller (firm) and potential buyers. Indeed, the finance literature has documented the large decrease in price following an announcement by the firm that it is going to sell new equity (a seasoned equity offering, SEO). For example, see: Masulis and Korwar (1986) and Korajczyk et al. (1991).6 A main implication of the trade off between efficiency and liquidity described in our paper is that investors with high (low) expected liquidity needs are more likely to choose less (more) control. This is because investors with high expected liquidity needs are affected more by the low sale price associated with control, whereas those with low expected liquidity needs are affected more by the efficiency in management. As a result, in equilibrium, assets under control are less likely to be liquidated prematurely. This is consistent with evidence provided by Hennart et al. (1998) and other papers in the management literature. They show that international investors are much more likely to exit from joint ventures than from fully owned investments, which clearly exhibit more control. In the context of our paper, since FDI exhibit more control than FPI, FDI are expected to be liquidated less often. This is consistent with empirical evidence cited in the beginning of our paper. It also contributes to the low volatility of net FDI inflows relative to net FPI inflows, which is one of the key observations motivating our analysis. Interestingly, these effects are magnified by asymmetric-information externalities among investors with high expected liquidity needs: when fewer investors of their type choose direct investments, the re-sale price of these investments will decrease, and the incentive of each investor of this type to choose these investments will decrease. These externalities generate multiple equilibria for some parameter values in our model, where some equilibria are characterized by more FDI than others. We show in the paper that when such multiplicity exists, the host country benefits more under the equilibrium that exhibits more FDI. Of course, equilibrium patterns of investment will vary across countries, depending on the characteristics of investors and on those of the host country itself. In the paper we analyze the patterns of investment as a function of three parameters: the heterogeneity across foreign investors in their expected liquidity needs, the cost of production in the host country, and the level of transparency between owners and managers in the host country (corporate-governance transparency). We employ our results on the last two parameters to derive predictions regarding the differences between developed economies and developing economies. These predictions, which are broadly consistent with the empirical facts described above, are based on the hypotheses that developed countries have higher costs of production and higher levels of transparency than developing countries. Some papers in the literature develop ideas related to the ideas in the current paper. Albuquerque (2003) develops a model aimed at explaining the differences between the volatility of direct investments and the volatility of portfolio investments. His paper relies on expropriation risks and the inalienability of direct investments, and thus is different from the information-based mechanism developed here. Other papers in the literature use the asymmetric-information hypothesis to address different issues related to FDI. In Froot and Stein (1991), Klein and Rosengren (1994), and Klein et al. (2002), the hypothesis is that FDI is information intensive, and thus FDI investors, who know more about their investments than outsiders, face a problem in raising resources for their investments. Gordon and Lans Bovenberg (1996) assume asymmetric information between domestic investors and foreign investors to explain the home bias phenomenon. Razin et al. (1998) explain the pecking order of international capital flows with a model of asymmetric information. Finally, Razin and Sadka (2003) analyze the gains from FDI when foreign direct investors have superior information on the fundamentals of their investment, relative to foreign portfolio investors. Importantly, none of these papers analyzes the effects of asymmetric information on the liquidity of FDI and FPI, which is a major factor in the trade off developed in the current paper. Finally, although we write this paper in the context of international capital flows, we believe the mechanism we suggest here is more general, and can serve to analyze the trade off between direct investments and portfolio investments, or between management efficiency and liquidity, in other contexts.7 In a related paper, Bolton and von Thadden (1998) analyze a trade off between direct investments and portfolio investments. Their model, however, is not based on the differences in information that each one of these investments provides. Kahn and Winton (1998) and Maug (1998) study models where the information held by institutional investors does not always improve the value of the firm, as institutional investors might use this information to make trading profits instead of to improve firm performance. These models do not look, however, at the decision of the investors on whether to acquire information when they might get liquidity shocks. Our paper also touches on other issues that have been discussed in the finance literature. Admati and Pfleiderer (1991) discuss the incentive of traders to reveal the fact that they are trading for liquidity reasons and not because of bad information. Admati and Pfleiderer (1988) and Foster and Viswanathan (1990) point to the existence of externalities between traders who trade for liquidity reasons. The remainder of this paper is organized as follows: Section 2 presents the model. In Section 3, we study the basic trade off between direct investments and portfolio investments. Section 4 analyzes the patterns of investments obtained in equilibrium for different parameter values. In Section 5, we extend the model to allow for different levels of transparency, and study the effect of transparency on the equilibrium outcomes. Section 6 concludes, and highlights additional implications of our model. Proofs are relegated to the Appendix.
نتیجه گیری انگلیسی
The model we developed in this paper describes an information-based trade off between direct investments and portfolio investments. In the model, direct investors are more informed about the fundamentals of their projects. This information enables them to manage their projects more efficiently. However, it also creates an asymmetric-information problem in case they need to sell their projects prematurely, and reduces the price they can get in that case. As a result, investors, who know they are more likely to get a liquidity shock that forces them to sell early, are more likely to choose portfolio investments, whereas investors, who know they are less likely to get a liquidity shock, are more likely to choose direct investments. The model generates several results that are consistent with empirical evidence. First, developed economies attract larger shares of FPI than developing economies. This is because the high production costs in developed economies make the projects there less profitable, and thus make it less beneficial to incur the fixed costs associated with FDI. Moreover, the high transparency in developed economies makes FPI there more efficient. Second, since investors with high expected liquidity needs are attracted to FPI, while those with low expected liquidity needs are attracted to FDI, our model can account for the high observed withdrawal rates of FPI relative to FDI, which also contribute to a high volatility of the former relative to the latter. Third, developed economies with high levels of transparency are expected to have smaller differences between the withdrawal ratios of FPI and those of FDI. This is because the high efficiency of FPI in those economies attracts more investors with low expected liquidity needs to FPI, and prevents complete separation in equilibrium between investors with low expected liquidity needs and those with high expected liquidity needs. In the rest of this section, we highlight six additional implications of our model that seem to us as promising directions for future research. One, the information-based trade off between direct investments and portfolio investments has implications for the expected yields on each type of investment. Thus, in case of a liquidity shock, direct investors get a very low return on their investment. Investors will be willing to bear that risk and make direct investments only if they are compensated in the form of a higher expected yield. In order to address this issue in an appropriate way, our model should be adjusted to include risk averse agents. As for empirical evidence, we are not aware of any empirical study that looked at the differences between the expected yield on direct investments and the expected yield on portfolio investments. We think our framework suggests an interesting testable prediction on this point. Two, our model can be extended to include debt flows. As is known in the theory of corporate finance, the price of debt is, in most cases, less sensitive to problems of asymmetric information. Thus, in our framework, the return on debt is expected to be less sensitive to liquidity shocks, and thus debt is expected to attract investors with even higher expected liquidity needs. Three, in Section 5, we developed the implications of transparency for cross-sectional differences in the composition and volatility of foreign equity flows. An interesting extension is to analyze the implications of transparency for time-series differences. Thus, in times of crisis, transparency may be lower, and thus the share of FDI will be larger and the differences in withdrawal rates between FPI and FDI will be larger as well. This seems consistent with casual empirical observations. Four, as demonstrated in Section 4.3, portfolio investments, in our model, occur sometimes as a result of a coordination failure among investors with high expected liquidity needs. When this happens, the host country can be better off if investors invest in direct investments. In these scenarios, the government can eliminate the bad equilibrium and improve welfare by encouraging FDI. However, as we also noted in the section, this recommendation should be taken with caution, since in other scenarios encouraging FDI might reduce welfare due to the high set-up costs of this form of investment. We believe that a more thorough analysis should be performed to understand when, in the real world, government intervention is warranted and when it is not. Also, other policy measures may be considered as means to improve welfare. For example, improving the corporate governance and judicial system in the country may enable managers and owners of portfolio investments to write contracts that would entice managers to choose capital as a function of productivity. This would improve not only the efficiency of FPI, but welfare overall. Five, our model generates predictions on the reversals of FDI and FPI in equilibrium. In the paper, we used these predictions to shed some light on the differences in volatility between net FDI inflows and net FPI inflows in the real world. We are aware that a full understanding of the differences in volatility requires one to analyze not only the reversals of the two forms of investment, but also the changes in new inflows over time. While this is beyond the scope of the current paper, we think that an extension of our model into a dynamic framework will be useful in conducting this analysis. Six, our model may be applicable to episodes like the Mexican crisis or the East Asian crisis, where FPIs were reversed much more than FDIs. One problem in this application is that liquidity shocks in our model are idiosyncratic, whereas the liquidity shocks in those episodes were understood to be aggregate shocks affecting the overall market liquidity. Thus, introducing aggregate shocks into the model may be an interesting extension of the current analysis. We believe that such an extension will not change the main results in the paper, especially those on the reversibility of FDI and FPI. The only assumption that is needed for our analysis to go through in the extended framework is that different investors will be affected to different degrees by aggregate liquidity shocks. Then, investors who are very sensitive to aggregate liquidity shocks will choose FPI, whereas those who are less sensitive to aggregate liquidity shocks will choose FDI. This, we believe, will keep the main results of the paper intact.