Working Paper: CEPR ID: DP1208
Authors: Rene M. Stulz; Walter Wasserfallen
Abstract: This paper provides a theory of foreign equity investment restrictions. We consider a model where the demand function for domestic shares differs between domestic and foreign investors because of dead-weight costs in holding domestic and foreign securities that depend on the country of residence of investors. We show that domestic entrepreneurs maximize firm value by discriminating between domestic and foreign investors. The model implies that countries benefiting from capital flight have binding ownership restrictions such that foreign investors pay a higher price for shares than domestic investors. The empirical implications of this theory are supported by evidence from Switzerland.
Keywords: Asset Pricing; Investment Restrictions
JEL Codes: G12; G15; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign equity investment restrictions (F23) | domestic firm value maximization (L21) |
| binding ownership restrictions (H13) | higher price for shares by foreign investors (G15) |
| differing demand functions (D11) | premium price for shares by foreign investors (G15) |
| higher deadweight costs for foreign investors (F23) | willingness to pay a premium for shares (G19) |
| ownership restrictions (R21) | enhanced shareholder wealth (G39) |