Can Foreign Stock Investors Influence Policymaking?

Abstract

Foreign portfolio stock investors (FPSIs) often attach political criteria to their investment choices, sometimes in the hope of pressuring policymakers in boycotted markets to adjust their policies. This article asks when the decision to not invest in foreign stock markets for political reasons catalyzes policy change in those countries. Unlike investors in government bonds that target state interests directly, FPSIs directly target the interests of the shareholders and managers of publicly listed firms. I argue that FPSI’s policymaking influence is limited by their ability to damage shareholders’ and managers’ interests and by those shareholders’ and managers’ ability to affect policy change. I test my theory with a quantitative analysis of a uniquely well-suited data set of policy reactions to CalPERS’ Permissible Equity Markets Policy. The results largely conform to my theoretical expectations.