Equity valuation effects of foreign capital expenditures : the role of property rights

Abstract

We examine common stock price reactions to offshore capital expenditures undertaken by U. S. multinational firms. Arguments based on optionality and expropriability lead to predicted price reactions conditioned on the degree of ambiguity in property rights enforcement in the host country. Our findings based on 159 foreign investment decisions reveal a significant influence of property rights ambiguity on the valuation effect. For investment in countries where property rights are enforced as reliably as in the U.S., firms experience and average increase in equity value of $41.83 million, or $1.614 per dollar invested.