T HIS is an empirical study of what determines the flotation of Canadian municipal and provincial bonds denominated in States dollars. The determinants of foreignpay flotations are important for two reasons: (1) States purchases of these flotations result in a significant inflow of capital to Canada from the States; and (2) a large part of States portfolio investment abroad is States purchases of new Canadian securities denominated in States dollars. This paper presents an analysis of individual issue data in order to establish the determinants. Many empirical studies of international portfolio investment have been conducted. Some of them are based largely on the Canadian-United States flows while others concentrate on the aggregate flows in and out of the States.' They are founded completely on aggregate economic data and are devoted to the analysis of time series. This paper is the first study to the author's knowledge that uses micro-economic data and cross-section analysis to investigate portfolio capital flows. If Canadian bond issuers behave rationally they will float their securities to enable their costs for any given issue to be minimized. These costs include both underwriting fees and interest payments. If the security is floated in the States and is denominated in States dollars, a subjective adjustment factor is included in the cost calculations to incorporate exchange rate risks. When Canadian issuers do make use of the States capital market to raise capital, they are expressing their preference for this market over the domestic market for these issues.2 During any given period does the States capital market appeal to a particular group of Canadian issuers or is the economic incentive to raise funds abroad spread evenly across Canadian issuers? If the incentive to raise funds abroad is equally great for each Canadian issuer, then foreign-pay issues will be selected from domestically floated issues by a random process; they will have no characteristics which distinguish them from domestic flotations. Alternatively, foreign flotations may appeal to a distinguishable group of issuers. If so, then what are the characteristics differentiating these issuers from domestic issuers? In part II of this paper foreign bond flotations are found to be statistically distinguishable from domestic bond flotations, and their differentiating characteristics are discussed. What factors give rise to the groupings observed in part II? The Canadian capital market may subject issues with certain characteristics to cost premiums so that the States market is especially attractive to these issues. Alternatively, the States market may offer these issues particular cost advantages. Thus, the grouping arises as a result of market characteristic configurations in Canada and in the States. * This article is based on the author's doctoral dissertation, United States Investment in Canadian Securities, 1958-1965, Harvard University, 1969 (unpublished). The research for this dissertation was financed by the Ford Foundation and by the National Science Foundation. The author accepts complete responsibility for the views expressed in the paper. 'For example see Robert Baguley, International Capital Flows and Canadian Monetary and Fiscal Policies, 1951-1962, unpublished Ph.D. dissertation, Harvard University, 1969; Gerald K. Helliner, Connections Between the States' and Canadian Capital Markets, 19521960, Yale Economic Essays, II (No. 2, 1962), pp. 351400; William Branson, Financial Capital Flows in the U.S. Balance of Payments (Amsterdam: North-Holland Press, 1968). 2 The distinction between the States capital market and the Canadian capital market is one between two regional markets. Each market is part of the world capital market but has characteristics which differentiate it from other components of the world market. This paper discusses the movement of capital from one regionally defined market to another.