The effects of barriers on equity investment in developing countries
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.
|Date of creation:||31 Mar 1994|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- N. Gregory Mankiw & Matthew D. Shapiro, 1984. "Risk and Return: Consumption versus Market Beta," NBER Working Papers 1399, National Bureau of Economic Research, Inc.
- 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 1121-52, September.
- Liliana Rojas-SuÃ¡rez & Donald J. Mathieson, 1993.
"Liberalization of the Capital Account: Experiences and Issues,"
IMF Occasional Papers
103, International Monetary Fund.
- Donald J. Mathieson & Liliana Rojas-SuÃ¡rez, 1992. "Liberalization of the Capital Account; Experiences and Issues," IMF Working Papers 92/46, International Monetary Fund.
- Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
- 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 607-36, May-June.
- 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.
- Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
- 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.
- Lessard, Donald R, 1974. "World, National, and Industry Factors in Equity Returns," Journal of Finance, American Finance Association, vol. 29(2), pages 379-91, May.
- Claessens, S. & Gooptu, S., 1993. "Portfolio Investment in Developing Countries," World Bank - Discussion Papers 228, World Bank.
- 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.
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)
If references are entirely missing, you can add them using this form.