The Effect of Equity Barriers on Foreign Investment in Developing Countries

This paper investigates stock performance in emerging markets in relation to their accessibility by foreign investors (as measured by the investability index of the IFC). Using the Stehle (1977) model, we reject for most markets integration and fail to reject for all segmentation. We find that there is a positive relationship between a stock's P/E-ratio and its investability index for most emerging markets, suggesting that barriers to access by foreigners have a negative impact. For four markets, this result is robust to the inclusion of the world beta and the degree of international spanning of the domestic market. A significant negative relationship between the investability index and stock return is only found for Jordan. This is likely because the effects of changes in the degree of access over time confound the cross-sectional relationship between return and investability indexes.