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Swiss capital markets have a number of peculiarities. First, companies sometimes impose ownership restrictions on their shares: typically, foreigners are excluded from holding registered shares. Second, after adjusting for differential dividend payments, shares with ownership restrictions trade at a substantially lower price than shares without such restrictions. Third, the prices of unrestricted and restricted shares of Nestlé became equal when the company decided to allow foreigners to hold registered shares. At the same time, the price ratio of unrestricted to restricted shares declined significantly for many other Swiss firms although they had not changed their ownership restrictions. In Discussion Paper No. 1208, René Stulz and Research Fellow Walter Wasserfallen explain the evolution of ownership restrictions, arguing that their existence and effects on prices can be explained by demand functions for domestic shares that differ between domestic and foreign investors. Under such conditions, a firm seeking financing by issuing shares will find it advantageous to price discriminate between the two classes of buyers, selling shares at different prices to foreign and domestic investors. Differential deadweight costs, such as withholding taxes, political risks and information costs, cause divergent price elasticities of asset demand, and as a result, shares available to foreign investors trade at a premium. The authors also allow the deadweight costs in their model to vary across investors within a country. A limited empirical analysis on the basis of cross-sectional data of share prices between 1985-89 generally confirms the implications of their model. Foreign Equity Investment Restrictions, Capital Flight, and Shareholder Wealth Maximization René M Stulz and Walter Wasserfallen Discussion Paper No. 1208, July 1995 (FE) |
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