TY - JOUR AU - Leuz, Christian AU - Lins, Karl V AU - Warnock, Francis E TI - Do Foreigners Invest Less in Poorly Governed Firms? JF - National Bureau of Economic Research Working Paper Series VL - No. 12222 PY - 2006 Y2 - May 2006 DO - 10.3386/w12222 UR - http://www.nber.org/papers/w12222 L1 - http://www.nber.org/papers/w12222.pdf N1 - Author contact info: Christian Leuz Booth School of Business University of Chicago 5807 S. Woodlawn Avenue Chicago, IL 60637-1610 Tel: 773/834-1996 Fax: 773-834-4585 E-Mail: cleuz@chicagobooth.edu Karl Lins University of Utah salt lake city, UT Tel: (801)5853171 E-Mail: finkvl@business.utah.edu Francis E. Warnock Darden Business School University of Virginia Charlottesville, VA 22906-6550 Tel: 434/924-6076 Fax: 434/243-8945 E-Mail: warnockf@darden.virginia.edu M1 - published as Christian Leuz, Karl V. Lins, Francis E. Warnock. "Do Foreigners Invest Less in Poorly Governed Firms?," in Michael Weisbach, editor, "Corporate Governance" The Review of Financial Studies, vol. 23, no. 3, March 2010 (2010) AB - As domestic sources of outside finance are limited in many countries around the world, it is important to understand the factors that influence whether foreign outside investors provide capital to a country's firms. This study examines whether and why investor concern about corporate governance results in fewer foreign holdings. We use a comprehensive set of foreign holdings by U.S. investors as a proxy for foreign investment and analyze a sample of 4,411 firms from 29 emerging market and developed economies. We find that foreigners invest significantly less in firms that are poorly governed, i.e., firms that have ownership structures that are more conducive to outside investor expropriation. Interestingly, this finding is not simply a matter of a country's economic development but appears to be directly related to a country's information rules and legal institutions. We therefore argue that information problems faced by foreign investors play an important role in this result. Supporting this explanation, we show that foreign investment is lower in firms that appear to engage in more earnings management. ER -