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Foreign Equity Investment Restrictions and Shareholder Wealth Maximization

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  • Rene M. Stulz
  • Walter Wasserfallen

Abstract

This paper provides a theory of foreign equity investment restrictions. In a setting where the demand function for domestic shares differs between domestic and foreign investors, domestic entrepreneurs can maximize firm value by discriminating between domestic and foreign investors. The empirical implications of this theory are supported by evidence from Switzerland. In contrast to mean-variance asset pricing models, the model correctly predicts that the relaxation of foreign equity investment restrictions decreases the value of shares available to foreign investors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4217.

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Date of creation: Nov 1992
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Publication status: published as Review of Financial Studies, Vol. 8, No. 4, 1995, pp/ 1019-1058.
Handle: RePEc:nbr:nberwo:4217

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  1. Ammer, John & Campbell, John, 1993. "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Scholarly Articles 3382857, Harvard University Department of Economics.
  2. Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-24, March.
  4. Horner, Melchior R., 1988. "The value of the corporate voting right : Evidence from Switzerland," Journal of Banking & Finance, Elsevier, vol. 12(1), pages 69-83, March.
  5. Bagwell, Laurie Simon, 1991. "Shareholder Heterogeneity: Evidence and Implications," American Economic Review, American Economic Association, vol. 81(2), pages 218-21, May.
  6. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-34, September.
  7. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  8. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
  9. Eun, Cheol S & Janakiramanan, S, 1986. " A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership," Journal of Finance, American Finance Association, vol. 41(4), pages 897-914, September.
  10. Werner Hermann & G.J. Santoni, 1989. "The cost of restricting corporate takeovers: a lesson from Switzerland," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-11.
  11. Hietala, Pekka T, 1989. " Asset Pricing in Partially Segmented Markets: Evidence from the Finnish Market," Journal of Finance, American Finance Association, vol. 44(3), pages 697-718, July.
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