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Foreign Equity Investment Restrictions, Capital Flight, and Shareholder Wealth Maximization: Theory and Evidence

René M. Stulz^1,2; Walter Wasserfallen³

¹ National Bureau of Economic Research · ² The Ohio State University · ³ Center for Economic and Policy Research

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.

DOI

10.1093/rfs/8.4.1019

Volume

8 (4)

Pages

1019-1057

Language

en

Export

BibTeX

Sources

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