TY  - JOUR
AU  - Baker,Malcolm
AU  - Foley,C. Fritz
AU  - Wurgler,Jeffrey
TI  - The Stock Market and Investment: Evidence from FDI Flows
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10559
PY  - 2004
Y2  - June 2004
UR  - http://www.nber.org/papers/w10559
L1  - http://www.nber.org/papers/w10559.pdf
N1  - Author contact info:
Malcolm Baker
Baker Library 261
Harvard Business School
Soldiers Field
Boston, MA  02163
Tel: 617/495-6566
Fax: 617/496-5271
E-Mail: mbaker@hbs.edu

C. Fritz Foley
Graduate School of Business Administration
Harvard University
Soldiers Field
Boston, MA 02163
Tel: 617/495-6375
Fax: 617/496-8443
E-Mail: ffoley@hbs.edu

Jeffrey Wurgler
Stern School of Business, Suite 9-190
New York University
44 West 4th Street
New York, NY  10012
Tel: 212/998-0367
Fax: 212/995-4233
E-Mail: jwurgler@stern.nyu.edu
AB  - Foreign direct investment offers a rich laboratory in which to study the broader economic effects of securities market mispricing. We outline and test two mispricing-based theories of FDI. The  cheap assets' or fire-sale theory views FDI inflows as the purchase of undervalued host country assets, while the  cheap capital' theory views FDI outflows as a natural use of the relatively lowcost capital available to overvalued firms in the source country. The empirical results support the cheap capital view: FDI flows are unrelated to host country stock market valuations, as measured by the aggregate market-to-book-value ratio, but are strongly positively related to source country valuations and negatively related to future source country stock returns. The latter effects are most pronounced in the presence of capital account restrictions, suggesting that such restrictions limit cross-country arbitrage and thereby increase the potential for mispricing-driven FDI.
ER  -