Liability of foreignness in banking sales and trading business
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2018-06-13
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Sheng, Hsia Hua
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International management literature arguments that foreign firms operate under Liability of Foreignness (LOF). Several previous studies looked at LOF in banks, with contradictory results. Our study however is focused exclusively in the business of Sales and Trading of investment banks. We hypothesize this holds true for this business of investment banks, as the disadvantages of foreignness will be greater than advantages such as access to global markets. We looked at profitability for 87 domestic and foreign investment banks in Brazil for 27 quarters, using Pooled OLS as our statistical model. We found that there is indeed liability of foreignness. Testing characteristics that might mitigate LOF, we found that the smaller psychic distance and large home country economy can have a positive effect in foreign banks profitability. Surprisingly, experience does not appear to have a mitigating effect on LOF.