Foreign Ownership Restrictions and Equity Price Premiums: Some Evidence on Demand, Sentiment, and Information
UC Riverside Working Paper No. 98-02
Posted: 26 Jun 1998
Date Written: January 1998
We study the impact of barriers to international capital flows with stock price data from eleven countries whose capital markets features shares restricted to locals and otherwise identical unrestricted shares to foreigners. Large price premiums for unrestricted shares relative to otherwise identical restricted shares are typically observed. Although basic notions of international asset pricing offer straightforward explanation for the price premiums, we find little evidence that the premiums are explained by lower foreign required returns. Alternative concepts and theories centering on investor demand, sentiment, and information availability are more successful in explaining the time-series and cross-section of price premiums. More specifically, premiums for unrestricted shares are positively correlated with international mutual fund flows, matching closed-end country fund premiums, national credit ratings, and coverage of companies by global publications.
JEL Classification: F00
Suggested Citation: Suggested Citation