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Foreign Ownership Restrictions and Equity Price Premiums: What Drives the Demand for Cross-Border Investments?

Published online by Cambridge University Press:  06 April 2009

Warren Bailey ,
Y. Peter Chung  and
Jun-koo Kang
Warren Bailey
Affiliation:
Johnson Graduate School of Management, Cornell University, Sage Hall, Ithaca, NY 14853
Y. Peter Chung
Affiliation:
Anderson Graduate School of Management, University of California, Riverside, Riverside, CA 92521
Jun-koo Kang
Affiliation:
Broad College of Business, Michigan State University, 315 Eppley, East Lansing, MI 48824.
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Abstract

We study the impact of barriers to international capital flows with stock price data from 11 countries whose stock markets feature shares restricted to locals and otherwise identical shares available to foreigners. Large price premiums for unrestricted shares relative to matching restricted shares are typically observed. Although basic notions of international asset pricing offer a straightforward explanation for the price premiums, we find little evidence that the price premiums are explained by lower foreign required returns. Alternative concepts and theories centering on foreign investor demand and the supply of shares explain some of the time-series and cross-sectional variation of price premiums. More specifically, premiums for unrestricted shares are positively correlated with foreign investor demand in the form of international mutual fund flows, sentiment implicit in matching closed-end country fund premiums, market liquidity, and information reflected in press coverage, country credit rating, and firm size.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 4 , December 1999 , pp. 489 - 511
Copyright
Copyright © School of Business Administration, University of Washington 1999

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