[This article 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 deadweight 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.]

[This article explores the information effect of financial risk management. Financial hedging improves the informativeness of corporate earnings as a signal of management ability and project quality by eliminating extraneous noise. Managerial and shareholder incentives regarding information transmission may differ, however, leading to conflicts regarding an optimal hedging policy. We show that these incentives depend on the accounting information made available by the firm. Under some circumstances, if hedge transactions are not disclosed (i.e., firms report only aggregate earnings), managers hedge to achieve greater risk reduction than they would if full disclosure were required. In these cases, it is optimal for shareholders to request only aggregate accounting reports.]

[Financial market regulations require various "insiders" to disclose their trades after the trades are made. We show that such mandatory disclosure rules can increase insiders' expected trading profits. This is because disclosure leads to profitable trading opportunities for insiders even if they possess no private information on the asset's value. We also show that insiders will generally not voluntarily disclose their trades, so for disclosure to be forthcoming, it must be mandatory. Key to the analysis is that the market cannot observe whether an insider is trading on private information regarding asset value or is trading for personal portfolio reasons.]

This article explores the information effect of financial risk management. Financial hedging improves the informativeness of corporate earnings as a signal of management ability and project quality by eliminating extraneous noise. Managerial and shareholder incentives regarding information transmission may differ, however, leading to conflicts regarding an optimal hedging policy. We show that these incentives depend on the accounting information made available by the firm. Under some circumstances, if hedge transactions are not disclosed (i.e., firms report only aggregate earnings), managers hedge to achieve greater risk reduction than they would if full disclosure were required. In these cases, it is optimal for shareholders to request only aggregate accounting reports.

This article 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 deadweight 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 benefitting 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. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Financial market regulations require various “insiders” to disclose their trades after the trades are made. We show that such mandatory disclosure rules can increase insiders’ expected trading profits. This is because disclosure leads to profitable trading opportunities for insiders even if they possess no private information on the asset’s value. We also show that insiders will generally not voluntarily disclose their trades, so for disclosure to be forthcoming, it must be mandatory. Key to the analysis is that the market cannot observe whether an insider is trading on private information regarding asset value or is trading for personal portfolio reasons.

[Closed-end country funds can trade at large premiums and discounts from their foreign asset values (NAVs). Investigating this anomaly, we find that individual fund premiums move together, primarily because of the comovement of their stock prices with the U.S. market. Moreover, an index of country fund premiums differentiates size-ranked U.S. portfolio returns and forecasts country fund stock returns. These findings suggest that international equity prices are affected by local risk. In particular, we show that country fund premium movements reflect a U.S.-specific risk, which may be interpreted as U.S. market sentiment.]

Closed-end country funds can trade at large premiums and discounts from their foreign asset values (NAVs). Investigating this anomaly, we find that individual fund premiums move together, primarily because of the comovement of their stock prices with the U.S. market. Moreover, an index of country fund premiums differentiates size-ranked U.S. portfolio returns and forecasts country fund stock returns. These findings suggest that international equity prices are affected by local risk. In particular, we show that country fund premium movements reflect a U.S.-specific risk, which may be interpreted as U.S. market sentiment.