Wash it all away

: the impact of the Lava Jato scandal on FDI stocks in Brazil

Abstract

This paper investigates if and how the detection and rigorous prosecution of a corruption scheme in Brazil affected German FDI flows to the country. To do so, the so-called Lava Jato investigation was taken as a shock to German investors. Using a synthetic control research design we show, that German investors indeed invested less in Brazil than it would have been the case without the scandal occurring. We estimate the costs of the scandal only with regards to German investments at 4.6 billion Euros between January 2014 and December 2017. We find our results to be significant at the 6.7% level, meaning that an effect of this size is quite unlikely to be the pure result of chance. The findings provide evidence for the theory that foreign investors are sensitive to perceived levels of corruption in emerging markets, even though those countries represent a huge market potential.

Date of Award	24 Jun 2019
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Daniela Campello (Supervisor)