Does Foreign Portfolio Investment Reach Small Listed Firms?

Abstract

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 marketswhen 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.

Extending UTAUT Theory to Compare South Korean and Chinese Institutional Investors’ Investment Decision Behavior in Cambodia: A Risk and Asset Model

“…Given the investment behavior in emerging markets, institutional investors pursue multiple investments with different types of alternative assets, forming a portfolio [2]. Under a multinational corporation view of investment, plenty of the literature has addressed different factors affecting investment behavior in international investment situations [3][4][5][6][7][8]. However, only some research has yet to compare and address the investment characteristics from different countries in Cambodia to explain how South Korean and Chinese institutional investors can maintain symmetry in investment competition and keep harmony.…”

The Volatility of Foreign Portfolio Investment and the Access to Finance of Small Listed Firms

“…In the first stage, FPI volatility is regressed on relevant variables. Separately, FPI is regressed on relevant determinants following the methodology in Knill (). The empirical models for the first stage are as follows: and where FPIVol is calculated in five different ways to ensure that results are not spurious based on the calculation.…”

“…Focusing on the stock market impact previously mentioned, the supply side of capital increases. The increased depth of financial markets caused by the level of FPI flowing into a financial market potentially eases the financial constraints of firms (Laeven, ; Harrison et al, ; Knill, ), improves the allocation of capital (Wurgler, ), and is often accompanied by improvements in the transparency of both fiscal reporting and corporate governance (Feldman and Kumar, ).…”

“…Kaminsky and Schmukler () suggest that regulations should protect nations from rapid exit of capital, which would negatively impact the liquidity of markets. This drop in liquidity could theoretically reverse the capital‐access benefits of FPI for small firms touted by Knill () since illiquid markets are associated with higher costs of raising external capital (Butler et al, ), in turn reducing the access to finance of small firms disproportionately. A drop in liquidity could also affect the attractiveness of these firms to investors (Dahlquist and Robertsson, ).…”

“…The extant literature contends that the volatility of capital flows can be damaging to an economy, or that it can at least diminish the benefits derived from foreign investment capital. Knill () finds that increases in FPI can improve the access to finance of small listed firms through a freeing up of capital when large firms access FPI directly. If volatility of FPI increases (e.g.…”