Regulatory Delay, Uncertainty, and the Cost of Foreign Investment Screening

Abstract

Many countries screen foreign direct investment through discretionary approval regimes that operate primarily through delay rather than outright prohibition. Because few transactions are blocked, governments describe screening as "light touch." We show that this characterization is misleading. When approval is costly to reverse and information arrives over time, screening functions as a real option: regulatory delay creates uncertainty that is capitalized into asset prices during review. Using Australian data, we estimate a 2.9% approval-event abnormal return for target firms, equivalent to around 20% of expected target-shareholder surplus. This measures the market value of resolving screening uncertainty for announced transactions. Aggregated across transactions, the implied valuation exposure is large relative to estimates of goods-trade barriers and rises further once deterred deals are considered. Screening also generates spillovers to rival firms and persistent valuation effects through repeated review of subsequent acquisitions by foreign-owned firms, with international spillovers particularly for Chinese investors.