Foreign Ownership Restrictions and Equity price Premiums: Explaining the High Cost of International Diversification.

Companies in many countries have designated shares restricted to locals and otherwise identical unrestricted shares available to foreigners. With the ever-increasing demand for international portfolio investments, these foreign ownership restrictions typically lead to large price premiums for unrestricted shares relative to otherwise identical restricted shares. The price premiums are a substantial additional cost to foreign portfolio investment. Using data from eleven countries with binding foreign ownership limits, we explore the relative pricing of restricted and unrestricted shares with a variety of concepts from the finance literature.