TY  - JOUR
AU  - Goldstein,Itay
AU  - Razin,Assaf
AU  - Tong,Hui
TI  - Liquidity, Institutional Quality and the Composition of International Equity Outflows
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13723
PY  - 2008
Y2  - January 2008
UR  - http://www.nber.org/papers/w13723
L1  - http://www.nber.org/papers/w13723.pdf
N1  - Author contact info:
Itay Goldstein
Wharton School
University of Pennsylvania
Philadelphia, PA  19104
E-Mail: itayg@wharton.upenn.edu

Assaf Razin
Department of Economics
Cornell University
Uris 422
Ithaca, NY 14853
Tel: 607/255-9625
Fax: 607/255-2818
E-Mail: ar256@cornell.edu

Hui Tong
Research Department
IMF Washington DC
700 19th Street N.W.
Washington, DC 20431
E-Mail: htong@imf.org
AB  - We examine the choice between Foreign Direct Investment and Foreign Portfolio Investment at the level of the source country. Based on a theoretical model, we predict that (1) source countries with higher probability of aggregate liquidity crises export relatively more FPI than FDI, and (2) this effect strengthens as the source country’s capital market transparency worsens. To test these hypotheses, we apply a dynamic panel model and examine the variation of FPI relative to FDI for 140 source countries from 1985 to 2004. Our key variable is the probability of an aggregate liquidity crisis, estimated from a Probit model, as proxied by episodes of economy-wide sales of external assets. Consistent with our theory, we find that the probability of a liquidity crisis has a strong effect on the composition of foreign equity investment. Furthermore, greater capital market opacity in the source country strengthens the effect of the crisis probability.
ER  -