Various listed companies in both developed and developing economies such as Switzerland, Finland, Sweden, Norway, Singapore, Malaysia, Thailand, Indonesia, Philippines, Taiwan, South Korea, and China have foreign ownership limits that prevent foreign investors from taking control. Such restrictions can have important implications for corporate governance. This study investigates the question: do foreign investors add value to a firm? If they do add to firm value, then is there a case for removing the foreign ownership limits? Stulz and Wasserfallen (1995) argue that for a country that enjoys the benefits of capital flight, it is optimal to impose such limits on foreign ownership in order to segment the markets for local and foreign shares. A unique event on the Stock Exchange of Singapore (SES) simultaneously tightened and relaxed the foreign ownership limits on banks. My findings suggest that imposing limits on foreign ownership on SES stocks is costing millions of dollars in shareholder value. Most of the companies considered in this study have other restrictions in place that limit share ownership. For example, it is not usual to find provisions in the articles of incorporation that restrict any person or related group of persons from holding directly or indirectly more than 5% of the issued share capital of the company. In the case of Singapore Press Holdings, the limit is further restricted to 3%. In the same light, Loderer and Jacobs (1995) and Stulz and Wasserfallen (1995) note that Nestle of Switzerland allows foreign investors to buy its registered shares with a limit of 3% for any one investor or group of investors. Such restrictions raise the question: is it worth the opportunity costs in firm value to impose a limit on foreign ownership when other-possibly tighter-restrictions are already in place? My findings and those reported in Loderer and Jacobs (1995) and Stulz and Wasserfallen (1995) concerning Nestle suggest that removing the limit on foreign ownership for a company with separate listings would probably increase firm value. Switzerland and Singapore are beneficiaries of capital flight. Specifically, foreign ownership appears to add value to Singapore-listed companies. In a relatively open financial economy such as Singapore's, removing the limit on foreign ownership allows for all of the firm's shares to be priced in the international capital market. This study undertakes a preliminary investigation of the premium on foreign shares on the SES. I find that firm size can explain the cross-sectional variation of the premium on foreign shares. I propose that firm size can be an efficient signal for information availability. My preliminary evidence suggests that information availability may be an important criterion for foreign investors when they pick stocks on the SES. Liquidity and volatility considerations appear to be proxy variables for firm size, and their effects are subsumed by firm size itself. The findings have important implications especially for the Asian economies that are beginning to liberalize their financial markets. The issue of restrictions on foreign ownership inevitably arises with the ongoing privatization of government-linked companies in Asia. Most would rather err on the conservative side and impose restrictions on their stocks to prevent a loss of control to foreign investors. This study therefore has important implications for governments and government-linked companies that may be considering the adoption or modification of such restrictions. Similarly, private corporations that currently have or are planning to have self-imposed restrictions on foreign ownership may want to review their decisions. This is especially so as companies in the various developed economies, like Nestle, are already beginning to drop them for good reasons.
