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The authors are, respectively, Senior Economist in the IMF’s Research Department and Economist in the Division of International Finance at the Federal Reserve Board. The authors thank, for helpful comments and suggestions, Campbell Harvey, Jean Imbs, Assaf Razin, Leigh Riddick, Jonathan Wright, and participants at the CEPR/London Business School Conference on International Capital Flows, the Kellogg School of Management Conference on Investments in Imperfect Capital Markets, the International Finance Division’s Monday Workshop, and at seminars at the Federal Reserve Bank of New York, University of Sydney, Washington Area Finance Association, Western Economic Association, and World Bank. We also thank Jean Tobin at the NYSE for data on listings of foreign stocks; Alka Banerjee of Standard and Poor’s for helping us with the S&P/IFC data; and Nancy Baer, Sara Holland, and Ben Sutton for research assistance. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or the International Monetary Fund, or of any other person associated with the Federal Reserve System or the IMF.
The view that an equity newly listed on a U.S. exchange is in effect a new security is consistent with the evidence of divergent behavior of owners of Mexican local and cross-listed firms (Tribukait, 2003) and abnormal returns in the run-up to the listing (Foerster and Karolyi, 1999).
Chuhan, Claessens, and Mamingi (1998) found that push factors—the decrease in U.S. interest rates and the slowdown in U.S. industrial production—help explain flows to both Latin American and emerging Asian countries from 1988 to 1992, and that pull factors such as equity returns or credit ratings matter for flows to Asia but not necessarily for Latin American flows. Calvo, Leiderman, and Reinhart (1993) also find evidence of an important role for global factors.
The evidence on past-returns-chasing behavior is mixed. Using monthly data, Bohn and Tesar (1996) find that investors chase past returns in 7 of 22 markets. The literature that focuses on information asymmetries using high frequency flows provides conflicting evidence; see, for example Dvorak (2002), Choe, Kho, and Stulz (2001), and Seasholes (2000).
Griever, Lee, and Warnock (2001) is a primer on the TIC data, which have been used in Tesar and Werner (1994), Brennan and Cao (1997), Taylor and Sarno (1997), Chuhan et al. (1998), and Bekaert et al. (2002). Other sources on capital flows data exist. Global (not bilateral) flows are available from the IMF’S International Financial Statistics database, but not for all countries and typically only annually or at best quarterly. High frequency capital flows data are available from proprietary sources, although it is difficult to gauge the scope of their coverage. Froot, O’Connell, Seasholes (2001) use proprietary data that include only transactions by State Street clients for which the countries of the currency and the foreign equity are the same. This excludes trading in ADRs, which are likely a large and variable portion of cross-border trading (Pulatkonak and Sofianos, 1999; Ahearne, Griever, and Warnock, forthcoming). Our data include transactions in ADRs. High frequency flows over short periods have also been analyzed by Richards (2002) and Griffin, Nadari, and Stulz (2002).
Consider, for example, three strategies that were available to Chrysler shareholders who were content with the share of foreign equities in their portfolios prior to the swap. They could have sold Chrysler after the merger was announced but before it occurred, which would have no confounding effect on capital flows data. If they decided that Daimler Chrysler was a better way to get exposure to Germany than other German equities, they might have rebalanced their portfolios by selling other German stocks before or after the swap. Such sales would appear in the TIC data, so the swap should be added to the flows data as a purchase. Finally, they could have sold Daimler Chrysler after the swap, which would also appear as sales in the TIC data; again, the swap should be entered as a purchase.
In this paper, as is customary in the international finance literature, we typically use the term financial liberalization when international financial liberalization (i.e., the opening of capital markets to foreigners or a reduction in capital controls) would be more appropriate. For a discussion of the link between domestic and international financial liberalization, see Levine (2001).
Other measures of capital controls exist, but are annual or do not capture the intensity of controls. See, for example, Alesina, Grilli and Milesi-Ferretti (1994), Quinn (1997), Rodrik (1998), Montiel and Reinhart (1999), and the survey by Eichengreen (2001).
If, for example, bank stocks are not available to foreigners, a pure banking sector shock would change the relative price of investable stocks and, hence, change relative market capitalizations.
In U.S. capital flows data, ADRs are treated just as any other foreign stock. Transactions between a U.S. resident and a foreign resident are recorded, while those between two foreign or two domestic parties are not.
Foreign securities that trade only as private placements (through rule 144A) or over the counter (Level I and unsponsored) may have reduced transaction costs compared to securities that trade only in emerging markets, because the need to hire a global custodian in the local market is circumvented and liquidity may be better in New York.
Because international securities transactions are reported to the TIC system using settlement date accounting, we move to the following month any listing that occurs in the last three business days of a month (last five days of the month for listings prior to June 1995).
Figure 4a and 4b do not give an indication of the portion of each country’s market listed on U.S. exchanges at a point in time. By the end of 1999, stocks representing about half of the Mexican, Argentinian, Chilean, Korean and Philippine markets, and about one quarter of the Brazilian and Indonesian markets, were cross-listed on the NYSE and NASDAQ.
Credit spreads on secondary market debt prices are another indicator of investment prospects, but are not available for a wide range of countries and, where available, start only in the early 1990s.
Long-horizon regressions are often used when modeling stocks returns; see the discussion in Campbell, Lo and MacKinlay (1997). Note that the long-horizon regressions impose an overlapping structure on the data that induces correlation in the errors. To correct for this autocorrelation—which for 12-month ahead regressions cannot be of order greater than eleven—we use Newey and West (1987) standard errors that effectively widen traditional standard errors on persistent explanatory variables.
The cross-listing effect might be greater if the variable was based on the firm’s float instead of its market capitalization, but float data are not available back to 1989. Also, abnormal returns prior to a cross-listing (Foerster and Karolyi, 1999; Miller, 1999) suggest that some buying might occur before the actual cross-listing.
Our risk ratings variable, RISK, was included to capture such changes in the investment environment. We tried other variables, including measures of exchange rate variability, to no avail.