Determinants of International Portfolio Investment Flows to a Small Market: Empirical Evidence

Abstract

This paper investigates the determinants of foreign portfolio investment flows into a market on which restrictions for foreign investments were recently removed, the Finnish stock market. During our research period, the relative share of the Finnish stock market owned by foreign investors has rapidly grown 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 significantly related above all to variables related to investment barriers, the dividend yield, liquidity, and firm size, and to some extent to profitability, variables robust in different model specifications. We also find a significant positive difference between the returns for foreign and local investors, which is largely explained by the foreign investors' larger holdings in the successful company Nokia which is dominating the Finnish market portfolio.