College of Business and Management, University of Maryland and the School of Business, State University of New York, respectively. We appreciate helpful comments made by the participants of the finance seminars at Minnesota and Maryland. We also thank an anonymous referee for his or her comments. Cheol S. Eun gratefully acknowledges support from the General Research Board of the University of Maryland.
A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership
Article first published online: 30 APR 2012
1986 The American Finance Association
The Journal of Finance
Volume 41, Issue 4, pages 897–914, September 1986
How to Cite
EUN, C. S. and JANAKIRAMANAN, S. (1986), A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership. The Journal of Finance, 41: 897–914. doi: 10.1111/j.1540-6261.1986.tb04555.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper derives a closed-form valuation model in a two-country world in which the domestic investors are constrained to own at most a fraction, δ, of the number of shares outstanding of the foreign firms. When the “δ constraint” is binding, two different prices rule in the foreign securities market, reflecting the premium offered by the domestic investors over the price under no constraints and the discount demanded by the foreign investors. The premium is shown to be a multiple of the discount, the multiple being the ratio of the aggregate risk aversion of the domestic and foreign investors. Given the aggregate risk-aversion parameters, the equilibrium premium and discount are determined by the severity of the δ constraint and the “pure” foreign market risk.