Risk to Firm Value for Taiwanese Companies Investing in China: Who Fares Better?
Hsu-Huei Huang (),
Min-Lee Chan () and
Yu-Sheng Chang ()
Additional contact information Hsu-Huei Huang: Department of Finance, National University of Kaohsiung, No. 700, Kaohsiung University Road, Kaohsiung 811, Taiwan
Min-Lee Chan: Department of Finance, Providence University, No. 200, Chung-Chi Road, Taichung 433, Taiwan
Yu-Sheng Chang: First Financial Group, No. 144, Sec. 1, Zihyou Road, Taichung 403, Taiwan
The main purpose of this paper is to study the effect on the stock price that a Taiwanese company may experience when announcing it is engaging in foreign direct investment in China. This study has been able to observe the influence of political risk on the FDI announcement effect during one of the tensest periods in the history of the cross-Strait relationship. We have found an overall significantly negative effect for all companies in Taiwan that announced they were investing directly in China during this risky period. We have further found that companies with higher free cash flow and greater information asymmetry experience worse stock price reactions to such announcements, and that those with low growth opportunities, higher institutional shareholdings, outside directors on the board, or a higher ratio of outside directors experience better stock price reactions to the announcements. Finally, we have found that the FDI announcement effect is better for firms whose board chairman also serves as the CEO or for firms that are family controlled.