Partially Segmented International Capital Markets, Securities Market Equilibrium, and Corporate Financial Policy

Working Paper 220

Posted: 13 Jul 1998

See all articles by Ian A. Cooper

Ian A. Cooper

London Business School

Evi Kaplanis

London Business School

Date Written: Undated

Abstract

This paper extends the literature on international capital market equilibrium and corporate finance. We modify the Stulz (1981) model to include an arbitrary number of assets and countries and an arbitrary structure of investment costs. Unlike models that simply assume particular kinds of segmentation, such as Adler and Dumas (1975) and Stapleton and Subrahmanyam (1977), we show how the combination of cross-border costs and short-selling constraints generates segmentation of international capital markets. The important contribution of the paper is that the effects induced by this segmentation are, in our model, related to the level of the costs generating the segmentation. We show how aspects of corporate financial policy such as the cost of capital, capital budgeting rules, optimal merger policy and the capital market risk premium depend on the level of costs to cross-border investment both directly through cross-border investment costs and indirectly through the portfolio segmentation induced by these costs. We also investigate how innovations such as ADRs and index futures affect cross-border investment costs and, through them, investor portfolios, equilibrium returns and optimal corporate decisions.

JEL Classification: G30

Suggested Citation

Cooper, Ian Anthony and Kaplanis, Evi, Partially Segmented International Capital Markets, Securities Market Equilibrium, and Corporate Financial Policy (Undated ). Working Paper 220, Available at SSRN: https://ssrn.com/abstract=7130

Ian Anthony Cooper (Contact Author)

London Business School ( email )

Sussex Place
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London, London NW1 4SA
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+44 171 262 5050 (Phone)

Evi Kaplanis

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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