A general theory of corporate international investment under incomplete information, short sales and taxes

•Corporate international investment decisions are modeled within information costs, short sales and taxes.•Information costs, real exchange risk and diversification motives explain international investments.•Our model is a generalization of the main well-known models in international investment decisions.•The model explains 'home bias puzzle' in international finance.

The theory of corporate international investment is extended to account for the effects of information costs, short sales and taxes on the management decision process. Our results explain how real exchange risk, competition and diversification gains affect corporate international investment decisions in this setting. The model includes clear forward looking explanations of some anomalies in the literature such as the 'home bias puzzle' in international finance.