The Impact of Foreign Equity Ownership on Emerging Market Share Price Volatility

We ask whether foreign equity ownership affects the stability of share prices in an emerging economy. We address the effect of ownership restrictions exogenously imposed on stock ownership and the impact of introducing or widening foreign ownership through cross‐listing. A methodology for variance ratio analysis is introduced that corrects for liquidity and volume differences across stock series experiencing different degrees of foreign ownership. We find that foreign ownership does not affect volatility in the absence of cross‐listing. Foreign ownership introduced or accompanied by cross‐listing of a stock series raises the variance of returns. This effect is found to operate in part through increases in volume traded on the domestic market following the listing, and through an identifiable increase in the volatility of information net of volume effects.