The effects of foreign investment activities on firm value

Abstract

Previous studies have examined the existence of announcement effects of international joint ventures and acquisitions to identify the sources of wealth gain to the shareholders of firms initiating them. While some researchers have found positive and significant market reactions to announcements of international joint ventures and acquisitions the results have been inconclusive. Further, previous researchers have not compared the market's reaction to announcements of different types of foreign investments. ln this paper, we use data on 173 announcements of international joint ventures, acquisitions and foreign direct investments by Australian companies during 1990-97 to provide a comprehensive comparison of these announcement effects. On average, shareholders of firms announcing foreign investments earn an average abnormal return of +O. 75% over a two-day announcement period. The abnormal returns earned by firms announcing foreign direct investments arc significantly higher than the abnormal returns earned by firms announcing international joint ventures or acquisitions. Further, we find that the distribution of wealth gains among international joint ventures and acquisitions depend on firm size, the type of industry, the existence of country risk, and whether the investment is located in an emerging market.