[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.]

American Finance Association, Report of the Managing Editor of the Journal of Finance for the Year 1994, The Journal of Finance, Vol. 50, No. 3, Papers and Proceedings Fifty-Fifth Annual Meeting, American Finance, Association, Washington, D.C., January 6-8, 1995 (Jul., 1995), pp. 1013-1024

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.

Offshore dollar-denominated equity-linked issues were a more important source of funds for Japanese companies during the 1980s than domestic equity and straight debt issues combined. Using a sample of Japanese equity-linked offshore issues from 1977 to 1989, we find that the announcement of these issues is accompanied by a significant positive abnormal return. This contrasts with evidence that U.S. equity-linked issues have a significant negative stock price reaction. We provide an explanation for the difference in stock price reactions between U.S. and Japanese issues that is based on the greater influence on managers' security issue decisions of long-term investors and banks in Japan than in the U.S.