CID Working Paper No. 223
Maurice Kugler and Hillel Rapoport
The gravity model has provided a tractable empirical framework to account for bilateral flows not only of manufactured goods, as in the case of merchandise trade, but also of portfolio assets. In particular, Portes and Rey (2005) show that the gravity model successfully accounts for the pattern of cross-border equity portfolio flows. The interpretation given to the negative coefficient on the distance measure in this context is not that distance proxies for transportation costs but rather that it proxies for information costs. Thus, information asymmetries are more severe when investors consider acquiring equity in assets based in far flung locations. In this paper, we explore to what extent migration plays a role in mitigating such informational asymmetries (indeed, migrants can convey information about assets in their country of origin to investors based in the destination country) and find that migration, and especially skilled migration, is associated with larger cross-border equity investment from the destination country of the migrant into assets based at the origin country of the migrant. We interpret these results as providing further evidence of the role of information asymmetries in explaining cross-border equity portfolio flows, and of the instrumental role of skilled migrants in promoting capital inflows to their home country.
JEL subject codes: F21, F22, O1
Keywords: Migration, international equity portfolio flows, information