available in the regression where _ri_ is the return on asset _i_ ; _r_ 0 is average return on all assets; _Xc_<sup>_′_</sup> ( _i_ )<sup>isavectorwhose</sup> elements are various characteristics of country _c_ where the investment is located; _εi_ is an error term. The coefficient _β_ is not interpreted as a causal effect, but rather as an estimate of the average differences in return observed across groups of countries defined by _Xc_<sup>_′_</sup> ( _i_ )<sup>.Observeddifferencesin</sup> returns confirm that capital markets are imperfectly integrated because the law of one price does not hold. If _β_ = 0, markets are said to be segmented because the return differs across capital markets. Conversely, if all countries participate in a perfectly integrated capital market, _β_ = 0, and country characteristics do not affect investments’ average financial performance because all investors receive the same return for their capital.

A key requirement to estimate Equation (1) is a long time series of returns. Even if international capital markets are perfectly integrated, idiosyncratic risk _εi_ could, over a short time horizon, lead to an estimate of _β_ = 0. A key strength of the IFC data is thus the long length (58 years) of the time series. The existing literature on international capital market integration tests for differences in returns across much shorter time periods, studying, for instance, the covariance of international public equity indices (Campbell and Hamao 1992, Harvey 1995). Caselli and Feyrer (2007) calculate the marginal product of capital (which is equal to its price in equilibrium) using data from a crosssection of national accounts. They find that it does not vary substantially across countries (i.e., that _β_ = 0), and conclude that “there is no prima facie support for the view that international credit frictions play a major role in preventing capital flows from rich to poor countries.” Chari and Rhee (2020) use Worldscope data to construct a sample of publicly traded companies in 44 emerging stock markets between 1997 and 2004. They find financial returns for publicly traded firms to be equalized across countries and draw a similar conclusion. With 58 years of data, and coverage of many more countries than most data sets, the IFC data provide a stronger test of the capital market integration hypothesis than all of these datasets would.

Studying returns to private equity specifically, rather than returns in the national accounts or public indices, also provides a more demanding test of the market integration hypothesis. As fund managers have argued, it is not the listed or largest firms whose capital shows up in national accounts that are most likely to have high-return projects that go unfunded, but rather firms on the margins, precisely those targeted by private equity investors.

**Measurement of Risk.** Investors care about risk-adjusted returns, and risk may vary across countries. The cash flow data enables us to account for some risk in two ways. First, we measure returns _ri_ using the public market equivalent (PME). This measure is described in detail in Section 3.2, and expresses investment performance relative to a benchmark index such as the S&P 500. As a result, our measure of returns is risk-adjusted for correlation with the benchmark index of

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