The Determinants of Cross-Border Equity Flows

Richard Portes (1, 2, 3, 4, 5)

1 London Business School
2 DELTA - Département et Laboratoire d'Economie Théorique et Appliquée
3 CEPR - Center for Economic Policy Research
4 NBER - The National Bureau of Economic Research
5 Princeton University

We explore a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-1996. We show that a "gravity" model explains international transactions in financial assets at least as well as goods trade transactions. Gross transaction flows depend on market size in source and destination country as well as trading costs, in which both information and the transaction technology play a role. Distance proxies some information costs, and other variables explicitly represent information transmission, an information asymmetry between domestic and foreign investors, and the efficiency of transactions. The geography of information is the main determinant of the pattern of international transactions, while there is weak support in our data for the diversification motive, once we control for the informational friction. We broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings.

Mots clés: Equity flows; Cross-border portfolio investment; Information asymmetries; Gravity model; Home bias

Domaines: Economies et finances

Richard Portes. The Determinants of Cross-Border Equity Flows. Journal of International Economics, 2005, 65 (2), pp.269-296. ⟨10.1016/j.jinteco.2004.05.002⟩. ⟨halshs-00754100⟩