AN ANALYSIS OF FOREIGN VERSUS LOCAL SHARES IN THE SINGAPORE STOCK MARKET

Abstract

Restrictions in the form of limits on foreign equity holding aimed at protecting ownership of some local publicly-listed companies against foreign control of local assets prevail in Singapore. A contentious issue arising from this situation is the existence of a premium which is the difference between foreign over local share price. This premium, which prevails despite the two markets exhibiting identical risks parameters, has aroused public concern over the issue of market equity. This dissertation demonstrates the existence of market segmentation caused by the foreign equity holding limits in the Singapore stock market. The impact of market segmentation on the Law of One Price is evaluated by comparing the performance of foreign (restricted) and local (unrestricted) shares. In general, foreign shares outperform local shares and cause the existence of a price premium between them. There is, however, no significant difference in the risk behaviour of the two segments of the market to justify the maintenance of this premium. The findings therefore are not consistent with the CAPM's apriori expectations. Rates of returns are also adjusted for the different degrees of risks, namely, ?, systematic risks and ?, total risks, using the (PTT) Treynor' s and (PI8) Sharpe's measures of returns. PIT shows that foreign shareholders are generally better compensated than their local counterparts. A comparison of the results for ? shows foreign shares to be more risky in terms of their total risks. They are also compensated with higher returns, after adjustment is made for this total risk. Our findings on the volume study show that the market for the foreign shares is more liquid than the market for local shares. Findings in the study show that local shares are undervalued vis-a-vis foreign shares because there is no significant difference in the risks between the two classes of shares to justify the existence of premium. Market segmentation appears to violate the economic principle of equity but does not provide conclusive evidence to suggest that the Law of One Price is violated. Removing the artificial legal barriers of foreign limits that segment the market (preferably in a gradual fashion) would restore one equilibrium price between the foreign and local shares and bring back equity in the market.