Market Segmentation and Stock Prices: Evidence from an Emerging Market

Abstract

Restrictions on equity ownership are common in many countries, especially emerging markets. Yet, despite their importance, many basic empirical questions regarding the effects of such barriers to investment remain unanswered. This paper examines the relation between stock prices and market segmentation induced by ownership restrictions in Mexico. The Mexican market is of particular interest, because firms typically issue multiple classes of equity that differentiate between foreign and domestic traders, and in the case of financial firms, between domestic individuals and institutions. We document significant stock price premia for unrestricted stock, reflecting segmentation induced by ownership restrictions. Using panel data techniques, we analyze the determinants of segmentation across firms and over time. In addition to economy-wide factors, such as foreign perceptions of currency risk, segmentation also reflects the relative scarcity of unrestricted shares. Our results are consistent with theoretical models, in which firms adjust their outstanding shares to discriminate between investor groups with different demand elasticities.

JEL Classification: G15, G32