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The Effect of Equity Barriers on Foreign Investment in Developing Countries

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  • Stijn Claessens
  • Moon-Whoan Rhee

Abstract

This 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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  • Stijn Claessens & Moon-Whoan Rhee, 1993. "The Effect of Equity Barriers on Foreign Investment in Developing Countries," NBER Working Papers 4579, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4579
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    Cited by:

    1. Feldman, Robert A & Kumar, Manmohan S, 1995. "Emerging Equity Markets: Growth, Benefits, and Policy Concerns," The World Bank Research Observer, World Bank, vol. 10(2), pages 181-200, August.
    2. Karen K. Lewis, 1998. "International Home Bias in International Finance and Business Cycles," NBER Working Papers 6351, National Bureau of Economic Research, Inc.
    3. Lewis, Karen K., 1995. "Puzzles in international financial markets," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 37, pages 1913-1971, Elsevier.
    4. Sin-Yu Ho & Bernard Njindan Iyke, 2017. "Determinants of stock market development: a review of the literature," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 34(1), pages 143-164, March.
    5. Joshua Aizenman, 1999. "International Portfolio Diversification with Generalized Expected Utility Preferences," Canadian Journal of Economics, Canadian Economics Association, vol. 32(4), pages 995-1008, August.
    6. Buthiena Kharabsheh & Ahlam Aldaher, 2020. "The Impact of Foreign Direct Investment on Financial Market Development: The Case of Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 64-73, July.
    7. Jeffrey A. Frankel & Chudozie Okongwu, 1995. "Liberalized Portfolio Capital Inflows in Emerging Capital Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," NBER Working Papers 5156, National Bureau of Economic Research, Inc.

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