Please use this identifier to cite or link to this item: https://scholarbank.nus.edu.sg/handle/10635/170378
Title: THE FOREIGN PREMIUM PUZZLE : EFFECTS OF RESTRICTION ON FOREIGN OWNERSHIP OF SINGAPORE LISTED COMPANIES
Authors: IVAN CHAN
Issue Date: 1994
Citation: IVAN CHAN (1994). THE FOREIGN PREMIUM PUZZLE : EFFECTS OF RESTRICTION ON FOREIGN OWNERSHIP OF SINGAPORE LISTED COMPANIES. ScholarBank@NUS Repository.
Abstract: In Singapore, companies operating in strategic industries are protected from foreign control by a restriction on the percentage of foreign equity holdings. Furthermore, to distinguish between shares in these companies that are owned by foreigners and those that are owned by locals, the SES requires that these two classes of shares be separately listed. The foreign premium puzzle arises because even though locally owned and foreign-held shares offer investors the same dollar dividend payoffs, "foreign" shares in general, tend to trade at a premium to "local" shares. Previous studies have shown that foreign premiums exist when the demand for "foreign" shares is in excess of the restriction limit on foreign ownership. An objective of this Academic Exercise is to extend this argument further by showing that foreign funds movement affect demand conditions and this in turn will cause foreign premiums to rise and fall. Using the Price-Earnings differential between the local and foreign equity markets as a proxy tor the direction of funds flow, it was found that British funds had the most influence on foreign premiums. Hong Kong and American funds also had some influence while Japanese funds was not a major factor affecting foreign premiums. The second objective of this Academic Exercise is to study the behaviour of foreign premiums during dividend payments, bonus and rights issues. The results indicate that foreign premiums decrease prior to the ex-bonus date as local investors who are not eligible for the bonus shares sell their holdings of foreign shares. After the ex-bonus date, foreign premiums were found to increase as these investors repurchase their foreign shares. This result is significant as it shows that the actions of local investors are not inconsequential in determining foreign premiums. This study also found that foreign premiums were not affected during rights issues and dividend payments. This can be explained by the existence of market transaction costs.
URI: https://scholarbank.nus.edu.sg/handle/10635/170378
Appears in Collections:Bachelor's Theses

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