Cross-Border Listings, Capital Controls, and U.S. Equity Flows to Emerging Markets
IMF Working Papers, December 1, 2003
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- Cross-Border Listings, Capital Controls, and U.S. Equity Flows to Emerging Markets
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Bibliographic details
- Authors: Hali J Edison, Francis E. Warnock
- Published: December 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451875706.001
Summary of analysis and framework
- The paper analyzes capital flows to emerging markets using a framework that incorporates:
- Two quantitative measures of financial integration: the intensity of capital controls and the extent of cross border listings.
- Controls for traditional global (push) and country specific (pull) factors.
- Main empirical approach evaluates capital flow responses to cross listings and to changes in capital controls while accounting for push and pull variables.
Key findings
- Cross-listing effects:
- The cross listing of an emerging market firm on a U.S. exchange is an important but short lived capital flows event.
- Interpretation: the cross listed stock functions effectively as a new security that U.S. investors quickly incorporate into their portfolios.
- Financial liberalization / capital controls:
- A reduction in capital controls results in increased inflows only when the controls are binding.
- Implication: the effect of financial liberalization on capital flows is more nuanced than suggested by event studies.
- Push and pull factors:
- Global factors are important: slack U.S. economic activity is associated with increased flows to emerging markets.
- U.S. investors appear to chase expected, but not past, returns.
Policy-relevant implications
- Cross-listing:
- Cross listings generate rapid, concentrated inflows that dissipate relatively quickly; monitoring is important for market stability assessments.
- Capital controls:
- Policymakers should recognize that easing capital controls will increase inflows primarily when existing controls are binding; blanket expectations of inflow surges after liberalization may be misplaced.
- Investor behavior and global linkages:
- U.S. macroeconomic slack can drive capital to emerging markets, highlighting the role of global push factors in shaping flows.
- Measures of expected returns (rather than past returns) are relevant for anticipating U.S. portfolio equity flows.