Does founder ownership affect foreign investments? Evidence from India

- The paper examines the effect of founder ownership on foreign investments.
- We find a U-shaped relationship.
- We find a negative effect of business group on foreign investments.
- We show that our results are stronger for firms having more earnings management.

We study the effect of founder ownership on foreign investments for Indian firms. We show that foreign investors underinvest in firms with higher level of founder ownership, since these firms are more vulnerable to information problems and expropriation risk. This effect is particularly stronger when founder ownership exceeds a threshold beyond which founders hold effective control on firms. We exhibit that information problems are the main cause of the relation between foreign investments and founder ownership. This is because the relationship is more pronounced in case of business group firms and firms that are engaged in more earnings management.