IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/1263.html
   My bibliography  Save this paper

The effects of barriers on equity investment in developing countries

Author

Listed:
  • Claessens, Stijn
  • Moon-Whoan Rhee
  • DEC

Abstract

Equity flows to developing countries climbed to an estimated $13 billion in 1992, four times the amount invested three years earlier. Investment increased partly because countries removed restrictions on foreign ownership, liberalized capital account transactions, and generally made foreign access to their markets easier. The authors investigate how stock performance in emerging markets is affected by foreign investors'formal access to stocks (as measured by the International Finance Corporation's index of"investability"). To measure foreigners'access to emerging-market stocks, they use the investability index created by the IFC's Emerging Market Data Base. The IFC indexes should be a good indicator of changes in legal barriers over time or of the relative importance of those barriers across securities in one market at a given point in time, or across markets. Using the Stehle (1977) model, the authors reject the hypothesis that emerging markets are integrated with world capital markets (for most emerging markets). They fail to reject the hypothesis that emerging markets are segmented (for all emerging markets). The authors interpret this as legal and other barriers limiting foreign investors'access to emerging markets. They next investigate the relationship between stock performance and the investability index to determine the importance of legal barriers relative to other barriers. They find a strong relationship between a stock's price-earnings ratio and its investability index, which suggests that formal barriers to foreigners'access has a negative effect on stock prices and thus raises the cost of capital for firms listed. Countries could lower the (risk-adjusted) cost of capital, they contend, by removing legal barriers to foreign investors'access to equity markets.

Suggested Citation

  • Claessens, Stijn & Moon-Whoan Rhee & DEC, 1994. "The effects of barriers on equity investment in developing countries," Policy Research Working Paper Series 1263, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1263
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/1994/03/01/000009265_3961006032355/Rendered/PDF/multi_page.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Donald J Mathieson & Liliana Rojas-Suárez, 1992. "Liberalization of the Capital Account; Experiences and Issues," IMF Working Papers 92/46, International Monetary Fund.
    2. Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-124, March.
    3. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
    4. N. Gregory Mankiw & Matthew D. Shapiro, 1984. "Risk and Return: Consumption versus Market Beta," NBER Working Papers 1399, National Bureau of Economic Research, Inc.
    5. Alexander, Gordon J. & Eun, Cheol S. & Janakiramanan, S., 1988. "International Listings and Stock Returns: Some Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(02), pages 135-151, June.
    6. Claessens, S. & Gooptu, S., 1993. "Portfolio Investment in Developing Countries," World Bank - Discussion Papers 228, World Bank.
    7. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    8. Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
    9. Errunza, Vihang & Losq, Etienne & Padmanabhan, Prasad, 1992. "Tests of integration, mild segmentation and segmentation hypotheses," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 949-972, September.
    10. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    11. Lessard, Donald R, 1974. "World, National, and Industry Factors in Equity Returns," Journal of Finance, American Finance Association, vol. 29(2), pages 379-391, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ercan Balaban, 1995. "Informational Efficiency of the Istanbul Securities Exchange and Some Rationale for Public Regulation," Discussion Papers 9502, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    2. Ercan Balaban, 1995. "Some Empirics of the Turkish Stock Market," Discussion Papers 9508, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    3. Abid, Ilyes & Kaabia, Olfa & Guesmi, Khaled, 2014. "Stock market integration and risk premium: Empirical evidence for emerging economies of South Asia," Economic Modelling, Elsevier, vol. 37(C), pages 408-416.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1263. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi) or (Marina Grazioli). General contact details of provider: http://edirc.repec.org/data/dvewbus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.