The Effect of Investment Type on Industrial Information Transfer of Foreign Direct Investment Announcement
A. Corporate characteristics of announcing firms
5. Empirical results analysis 1 Descriptive statistics
5.3 Announcements of investment in China- information transfer effect analysis In this section, we use a multivariate cross-sectional regression to capture the
overall effect of the distinguishable characteristics that influence the intra-industry
effects of FDI announcements.
Table 5 showshow afirm’sannouncementofinvestmentplansin Chinaaffectsthe abnormal returns of home-market rival firms. Empirical model used in Table 5 includes the announcing firm’s characteristics, industry characteristics, and rival firms’
characteristics as the independent variables. From Table 5, in various event windows of China investment, the CARs of announcing firms and their home rivals are significantly and positively related. In the regression model of event windows (-1, 0), (-2, 2), (-5, 5), and (-10, 10), regression coefficients of information transfer from the announcements of investment in China (i.e.,
) are 0.1111, 0.1309, 0.1226, and 0.1286, respectively, all
1 reaching the significant level of 1%. The finding is consistent with our earlier result that for the sample as a whole, the contagion effect dominates the competitive effect.Therefore, the contagion effect hypothesis of FDI announcements (Hypothesis 3a) is confirmed. The result shows that the positive contagion effect on home-market industry rivals is larger when the announcement effect on the China investment firm is more favorable. This result supports the idea that the information transfer effects of FDI announcements are more pronounced when the stock price of the announcing firm is affected to a greater degree.
We find that home-market rivals’stock price responses are significantly positively related to the announcing firm’s growth opportunities. We also find that when the investing firm faces intensifying competition, it renders a more negative effect on home-market competitors’abnormalreturns.This finding suggests that firms with high growth opportunities choose to make FDIs could reduce the degree of industry competition in home market. In addition, we find that on average, industry
capital investment plan ahead of others, however, its home-market rivals will experience impairing growth options and negative effect on the future profitability. On the other hand, rival firms with higher financial leverage are likely to hold less worthwhile investments and have limited ability to respond to competitive challenges in the industry than rivals with lower financial leverage. Therefore, the valuation impact of FDI announcements on home-market rivals is less favorable for those with higher growth options and higher financial leverage. We find that on average, the cross-sectional differences resulting from the abnormal returns of rivals after the FDI announcements are affected by the announcement year. Finally, we find that industry rivals’stock price responses are not significantly affected by the rivals’relative size and R&D intensity. The results suggest that these factors are relatively trivial in assessing the valuation effects of FDI announcements on home-market rivals.
Table 5
In order to understand how investment types affect information transfer when firms announce capital investments in China, we further analyze the influence of various investment types on the abnormal returns of home-market rival firms. Table 6 shows that the CARs of announcing firms investing in the vertical industry in various event windows are positively related to those of home-market rivals. For a shorter event window such as (-1, 0), the announcing firm presents a significantly positive effect on the abnormal returns of home-market rivals. However, for larger event windows, such as (-5, 5), industrial transfer effect becomes weak and insignificant. On the other hand, for firms adopting horizontal industry FDIs, the CARs of announcing firms in various event windows are significantly and positively related to those of home-market rival firms. Our results support again the contagion effect hypothesis of FDI announcements.
For firms adopting vertical FDIs, we find that home-market rivals’stock price responses are significantly negatively related to the announcing firm’s market shares and the rivals’relative size. We suggest that investors regard the firms adopting vertical FDIs as having an intention to seek overseas factories and pursue lower factor costs.
Therefore, the valuation impact of FDI announcements on home-market rivals is less favorable when the announcers’domestic market shares are higher and the rivals’
relative sizes are larger. On the contrary, for firms adopting horizontal FDIs, we find that home-market rivals’stock price responses are significantly positively related to the announcing firm’s market shares. We suggest that investors regard the firms adopting horizontal FDIs as having an intention to seek overseas markets and pursue higher foreign sales. Therefore, the valuation impact of FDI announcements on home-market rivals is more favorable when the announcers’domestic market shares are higher.
Table 7 shows the effect of China investment announcement on the abnormal returns of home-market rival firms between core and non-core business investments.
From table 7, the CARs of announcing firms investing in the non-core business in various event windows are significantly and positively related to those of home-market rivals. On the other hand, we find that the CARs of core business FDIs in various event windows are positively and significantly related to those of home-market competitors.
On average, the information transfer effect of core-related FDI announcement is smaller than that of non-core business FDI. That is to say, the contagion effect is more pronounced in the non-core business FDI when a firm announces plans for investment in China. Our empirical results suggest that the contagion effect of FDI announcements is affected by theannouncing firm’sinvestment types and strategies.
6. Conclusion
In the context of Taiwanese high-tech industry, this paper explored whether the choices of investment types affect the information content and information transfer effects that result from the mandatory announcement of China investment. The use of Taiwan data in this paper provides important international evidence and adds to our understanding of issues relevant in different business environments. Capital markets in regions on the Pacific Rim have attracted increasing attention from both practitioners and researchers. China and Taiwan (so-called Greater China) are representative of two of the fastest-growing economies in this region. They attract substantial investments from US, UK, Japan, and other multinational firms. Therefore, this study makes valuable contributions to the literature by providing insights into the stockholder wealth and intra-industry effects of FDI announcements by firms in emerging market.
We found that when announcements of investment in China occur, stock prices react more strongly for firms investing in China if their investment types are focused on vertical industries as opposed to horizontal industries. In addition, we found investors will give larger stock price reactions for firms investing in non-core businesses as compared to core businesses. Our results suggest that firms could adopt a vertical industry (non-core business) FDI type to access lower labor costs for export sales.
In addition, the contagion effect predicts that home-market rivals should experience a positive valuation effect, whereas the competitive effect predicts that they should experience a negative effect. We showed that China investment announcements generate a substantial information transfer effect, meaning abnormal returns of announcers are positively related to those of their home-market rivals. This
result is consistent with the contagion effect hypothesis of FDI announcements.
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