NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Anuk Serechetapongse

Department of Economics
Cornell University
Ithaca, NY 14583

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NBER Working Papers and Publications

December 2010Equity Prices and Equity Flows: Testing Theory of the Information-Efficiency Tradeoff
with Assaf Razin: w16651
The paper tests three hypotheses concerning foreign equity investment in the presence of liquidity risk. First, the FDI-to-FPI price differential is negatively related to liquidity risk (the "Price Discount Hypothesis"). The idea is that market participants do not know whether the FDI investor liquidates a firm because of an idiosyncratic liquidity shock, or because, as an informed investor, the firm is hit by a productivity shock. Second, the FDI-to-FPI composition of foreign equity investment skews towards FPI, if investors are expected to experience liquidity shortage in the future (the "Equity-Composition Hypothesis"). The idea is that because direct investments are more costly to liquidate, due to the price discount, the more severe is the expected liquidity shock, the smaller is the ...
 
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