The Effect of Equity Barriers on Foreign Investment in Developing Countries
AbstractThis 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.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4579.
Date of creation: Dec 1993
Date of revision:
Publication status: published as The Internationalization of Equity Markets, Jeffrey A. Frankel, ed., pp. 231-271, (Chicago: University of Chicago Press: 1994).
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