Protectionist law limiting foreign investment lowered stock prices

FINSA reduces firm value by interfering with free market principles
Lel Ugur


  • Congress passed FINSA in 2007 to protect national interests, but the law’s limits on foreign capital investments have hurt U.S. companies.
  • Because businesses affected by FINSA are denied access to foreign capital, they operate less efficiently.
  • FINSA created spillover effects, including reduced investor activity and lower stock prices.

When Congress passed the Financial Investment and National Security Act (FINSA) in 2007, it was meant to bolster national security. However, new research from the Terry College shows it put American companies at a global disadvantage.

FINSA allows the Committee on Foreign Investment in the United States (CFIUS) to block foreign acquisition of domestic companies that specialize in creating advantages for the U.S. military or intelligence services, such as high-tech companies and research-heavy organizations.

The law may or may not have made Americans safer, but it certainly reduced shareholder wealth, said finance professor and research co-author Ugur Lel.

“Having this kind of protectionist law damages the U.S. over time by making American firms less competitive because they lose access to capital,” he said. “Denying U.S. firms the ability to raise foreign capital actually limits their ability to compete in global markets. At the same time, the U.S. has a lot of foreign partners in trade and having these protection laws damages their profits as well.”

Specifically, Lel found that foreign takeovers of businesses affected by FINSA declined by 68% relative to unaffected firms. In contrast, domestic takeovers not subject to CFIUS review remained unchanged.

“The most efficient allocation of capital is often through mergers and acquisitions. It makes the economy more efficient and leads to more jobs,” Lel said. “This kind of financial protectionism harms shareholder wealth by creating a less liquid market for corporate control.”

FINSA had other consequences, too. When foreign takeovers became subject to additional government oversight, approval periods for mergers were extended, allowing more competing bids to crop up. That in turns lead to greater uncertainty and, by extension, less investment activity.

“One unintended consequence was that stock prices went down for firms that could be subject to FINSA,” Lel said. “Because those firms became less likely to be taken over, their shareholders were less likely to receive takeover premiums, which average around 25%. So it changed how investors worked.”

The bottom line, he said, is that the law continues to have a big effect on the U.S. economy.

“We understand there is a benefit passing FINSA because you don’t want foreign acquisition of technology for military purposes, but there’s no way we can quantify that,” he said. “We are only looking at the cost of FINSA and pointing out its effect on the economy. Foreign capital wants to come here, but FINSA makes it harder. In the short run, that affects prices. In the long run, it has negative effects on employment, competition, market efficiencies and global competition.”