Foreign direct investment and downside risk: Evidence from Taiwan

Abstract

Foreign direct investment (FDI) has become highly popular in recent decades. This study investigates how FDI by Taiwanese firms affects downside risk by considering the fact that FDI firms increase both the revenue and risk in their expedition. The results indicate that downside risk is positively associated with FDI. Further analyses show that downside risks do not change for FDI in Mainland China but increases in other areas. The FDIs in areas other than Mainland China are primarily in tax haven countries and are positively related to agency cost and earnings management, increasing the downside risk. In addition, this study provides evidence that corporate governance reduces downside risk by restricting FDI to less opaque markets.