Fire Sale FDI

Some financial crises are characterized by the simultaneous outflow of foreign portfolio investment and an inflow of foreign direct investment (FDI) in which foreign investors take controlling stakes in distressed firms. We explore an agency-theoretic framework for this phenomenon. Transfer of control that overcomes agency problems are made possible during crises, but, at the same time, efficient owners (e.g. other domestic firms) face financing constraints. The result is a transfer of ownership to foreign firms, including inefficient ones, at fire sale prices. These stakes are subsequently re-sold, or "flipped" back to local investors once the crisis abates. The them), finds strong empirical support during the Asian crisis.