Market Segmentation and the Cost of Capital in International Equity Markets

While theoretical models predict a decrease in the cost of capital from depositary receipt offerings, the economic benefits of this liberalization have been difficult to quantify. Using a sample of 126 firms from 32 countries and a size and country matched control sample, we document a statistically and economically significant decline in returns of 42 percent. This decline is driven by the pre-announcement diversification potential of the foreign firm. Both these results carry through if we use changes in dividend yields which deliver a decline of 66 basis points in the cost of capital. Indeed, financial market liberalizations have significant economic benefits. *McGill University and Texas A&M University respectively. We thank George Allayannis, Ked Hogan, Dennis Logue, Lemma Senbet, and seminar participants of the Fourth International Finance conference at Georgia Tech University and 1998 European Financial Management Association conference for insightful comments. Ross Prevatt and Alan Montgomery provided valuable research assistance. We also thank Social Sciences and Humanities Research Council of Canada and the Center for International Business Studies at Texas A&M University for financial support. We are grateful to the International Finance Corporation for providing the data on emerging markets.