Do Foreign Investors Insulate Firms from Local Shocks? Evidence from the Response of Investable Firms to Monetary Policy

Abstract

Extant theory suggests that foreign ownership of shares of emerging-market (investable) firms may insulate them from local shocks. Examining 24 emerging markets, we find that the returns of both investable and non-investable firms are sensitive to local monetary policy shocks. Surprisingly, in 46% of our country-sample, investable stock returns are more sensitive to local shocks than non-investable stock returns. Differences in leverage, stock liquidity, exposure to domestic product markets, or industry cyclicality do not drive these findings. These findings reinforce a positive association between investability and price efficiency found by prior research and have implications for the decision to further open frontier and emerging markets and the conduct of emerging-market monetary policy.

Keywords: investable stocks, non-investable stocks, local shocks, monetary policy, structural VAR, price efficiency, financial liberalization

JEL Classification: E52, F36, G15