Does Foreign Portfolio Investment Reach Small Listed Firms?

Abstract

Because investors generally choose to invest in large firms when investing internationally, it is not immediately obvious whether small listed firms would benefit from foreign portfolio investment. A capital infusion of this form could either serve to alleviate constrained capital markets or make large firms stronger, increasing competition and crowding out small firms. In this paper, I examine the impact of foreign portfolio investment on the capital issuance behaviour of small listed firms. I find that foreign portfolio investment (scaled by gross domestic product) is associated with an increased probability of small firm security issuance in all nations, regardless of property rights development. Evidence suggests that the mechanism by which this occurs is a freeing up of capital in domestic markets when large firms utilise foreign investment directly. Long-term debt levels increase in nations where property rights are more developed, suggesting that foreign portfolio investment may reach small firms through the banking channel as well in these nations. The banking channel results, however, are somewhat sensitive to the definition of foreign portfolio investment.