Determinants of international portfolio investment flows to a small market: Empirical evidence

This paper investigates the determinants of foreign portfolio investment flows into a market on which restrictions for foreign investments were removed in 1993, the Finnish stock market. During our research period, the relative share of the Finnish stock market owned by foreign investors had grown rapidly and was in December 1998, 53% of the total market value of the listed shares. Using company-specific data on the degree of foreign ownership, we report that foreign investment flows are above all significantly related to variables related to (i) investment barriers, as proxied by the variables Dividend yield, Liquidity, and firm size, and (ii) profitability or risk related variables. Additional analysis of subsequent portfolio performance did not provide robust evidence of apparent informational differences, which would result in either group (foreign or domestic investors) systematically outperforming the other.