The Effect of Equity Barriers on Foreign Investment in Developing Countries

52 Pages Posted: 11 Dec 2007 Last revised: 21 Jul 2010

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Moon-Whoan Rhee

Towson University - Department of Finance

Date Written: December 1993

Abstract

This paper investigates stock performance in emerging markets in relation to their accessibility by foreign investors (as measured by the investability index of the IFC). Using the Stehle (1977) model, we reject for most markets integration and fail to reject for all segmentation. We find that there is a positive relationship between a stock's P/E-ratio and its investability index for most emerging markets, suggesting that barriers to access by foreigners have a negative impact. For four markets, this result is robust to the inclusion of the world beta and the degree of international spanning of the domestic market. A significant negative relationship between the investability index and stock return is only found for Jordan. This is likely because the effects of changes in the degree of access over time confound the cross-sectional relationship between return and investability indexes.

Suggested Citation

Claessens, Stijn and Rhee, Moon-Whoan, The Effect of Equity Barriers on Foreign Investment in Developing Countries (December 1993). NBER Working Paper No. w4579. Available at SSRN: https://ssrn.com/abstract=480281

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Moon-Whoan Rhee

Towson University - Department of Finance ( email )

United States

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