HCBE Faculty Articles

Title

Corruption's Impact on Foreign Portfolio Investment

Document Type

Article

Date

2017

Publication Title

International Business Review

ISSN or ISBN

0969-5931

Volume

26

Issue

1

First Page

23

Last Page

35

Description

Corruption has significant effects on a nation’s financial markets through its adverse impact on foreign portfolio investment (FPI). Yet, the effects of corruption on FPI are nonlinear and reverse J-shaped, with intermediate levels of corruption yielding the most negative effects. Highly transparent nations, where a “level playing field” exists between foreign and local investors due to lack of information asymmetries related to corruption, attract the most foreign investment. However, at the margin, very corrupt countries attract more investment than moderately corrupt countries because a “perverse level playing field” in the former countries may put foreigners and locals on an even footing in terms of resolving asymmetric information problems. This nonlinear pattern is consistent with foreign investors’ desire to trade in markets where they are not at an informational disadvantage.

DOI

10.1016/j.ibusrev.2016.05.004

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