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Does Foreign Portfolio Investment Reach Small Listed Firms?


  • Recipient of the Center of International Business Education and Research (CIBER) and FMA 2004 Best Dissertation in International Finance Award. Much of this work was completed while I was a doctoral student at University of Maryland. Many thanks go to Vojislav Maksimovic for his advising on this research; his dedication to my work is very much appreciated. I am grateful to my committee members: Lemma Senbet, Gordon Phillips, Nagpurnanand Prabhala and Carmen Reinhart for all of their help as well. Thanks also to Robert Marquez, Guillermo Calvo, Enrique Mendoza, Thorsten Beck, Asli Demirgüç-Kunt, Leora Klapper, Robert Cull, Ali Nejadmalayeri, Chuck Lahaie, Scott Merryman, and an anonymous referee for their help, guidance and input. I am grateful for comments received at the FMA Doctoral Consortium, FMA Conference, SFA Conference, Florida State University, University of Missouri, and the Federal Reserve Board.


Because investors generally choose to invest in large firms when investing internationally, it is not immediately obvious whether small listed firms would benefit from foreign portfolio investment. A capital infusion of this form could either serve to alleviate constrained capital markets or make large firms stronger, increasing competition and crowding out small firms. In this paper, I examine the impact of foreign portfolio investment on the capital issuance behaviour of small listed firms. I find that foreign portfolio investment (scaled by gross domestic product) is associated with an increased probability of small firm security issuance in all nations, regardless of property rights development. Evidence suggests that the mechanism by which this occurs is a freeing up of capital in domestic markets when large firms utilise foreign investment directly. Long-term debt levels increase in nations where property rights are more developed, suggesting that foreign portfolio investment may reach small firms through the banking channel as well in these nations. The banking channel results, however, are somewhat sensitive to the definition of foreign portfolio investment.