Are Foreign Ownership and Good Institutions Substitutes? The Case of Non-Traded Equity

Abstract

High domestic shareholder concentration for publicly-traded firms is a common mechanism to mitigate minority shareholder expropriation in environments of poor investor protection. This offers an explanation of the home bias in share portfolios. An alternative mechanism, common in the case of non-traded firms, is to have a controlling foreign shareholder that may be subject to high international standards of investor protection. This Paper presents a model explaining a high foreign ownership share of non-traded equity in countries with poor investor protection. Empirical evidence supports the hypothesis that foreign ownership of non-traded equity is higher in countries with poor investor protection.

Keywords: Foreign ownership, shareholder protection, non-traded equity

JEL Classification: F36, G32