# **Appendix B: First Stage Regression for FPI Levels**

||**Dev**|**eloped Propert**<br>|**y Rights (N=57,2**<br>|**47)**|**Less**|**Developed Pro**<br>|**perty Rights (N=**|**9,169)**<br>|
|---|---|---|---|---|---|---|---|---|
||**1**|**2**|**3**|**4**|**5**|**6**|**7**|**8**|
|GDP Growth|-0.096***|-0.077***|-0.055***|-0.089***|0.138***|-0.001|0.121***|0.079***|
||[0.005]|[0.005]|[0.005]|[0.005]|[0.009]|[0.011]|[0.009]|[0.009]|
|Foreign Direct Inv.|0.387***|0.449***|0.330***|0.381***|-0.069***|-0.067***|-0.083***|-0.076***|
||[0.009]|[0.009]|[0.009]|[0.009]|[0.008]|[0.007]|[0.008]|[0.008]|
|Domestic Credit|0.007***|0.006***|0.007***|0.005***|0.031***|0.027***|0.030***|0.038***|
||[0.000]|[0.000]|[0.000]|[0.000]|[0.001]|[0.001]|[0.001]|[0.001]|
|Savings|-0.315***|-0.358***|-0.343***|-0.330***|-0.184***|-0.149***|-0.183***|-0.179***|
||[0.002]|[0.003]|[0.002]|[0.002]|[0.004]|[0.004]|[0.004]|[0.004]|
|Share|-0.008***|-0.005***|-0.007***|-0.007***|-0.006***|-0.008***|-0.005***|-0.014***|
||[0.000]|[0.000]|[0.000]|[0.000]|[0.000]|[0.000]|[0.000]|[0.001]|
|ΔFXChg|0.087***|0.106***|0.071***|0.092***|-0.030***|-0.025***|-0.031***|-0.029***|
||[0.003]|[0.003]|[0.003]|[0.003]|[0.001]|[0.001]|[0.001]|[0.001]|
|RelIntRates|0.818***|0.633***|0.388***|0.625***|-0.084***|-0.024***|-0.068***|-0.113***|
||[0.043]|[0.043]|[0.045]|[0.044]|[0.007]|[0.008]|[0.008]|[0.007]|
|FPIVol|-0.028***|-0.029***|-0.029***|-0.028***|0.020***|0.012***|0.025***|0.030***|
||[0.000]|[0.000]|[0.000]|[0.000]|[0.002]|[0.002]|[0.003]|[0.002]|
|Invest||-0.006***||||0.003***|||
|||[0.000]||||[0.000]|||
|Law|||-0.011***||||0.001***||
||||[0.000]||||[0.000]||
|Corruption||||-0.004***||||0.006***|
|||||[0.000]||||[0.000]|
|Constant|0.060***|0.142***|0.123***|0.080***|0.046***|0.018***|0.043***|0.031***|
||[0.001]|[0.003]|[0.002]|[0.002]|[0.001]|[0.002]|[0.001]|[0.001]|
|R-squared|0.484|0.496|0.493|0.487|0.490|0.520|0.492|0.519|

Notes. First stage regression results are shown for the following probit model: _P(Capital Issuance)i,t = γ0 + γ1FPIj,t-1 + γ 2Xi,t-1 + γ 3Yj,t-1 + γ 4Ii + γ 5t + ε_ where FPI is foreign portfolio investment standardized by gross domestic product and represents the instrumented value obtained from the following first stage regression: _FPIj,t = β0 + β1ΔFXRatej,t-1 + β2Sharej,t-1 + β3RelIntRatesj,t-1 + β4FPIVolj,t-1 + ε._ ΔFXRate is the change in the real foreign exchange rate. Share is country j’s market capitalization scaled by world market capitalization. RelIntRates is the annual real interest rates of country j scaled by sample average calculated annually. FPIVol is the variance of FPI flows in times t-1 through t-3. Development groups are based on the level of property rights in a nation. Only small firms are tested. Y is a vector of lagged macroeconomic variables including the following: GDP Growth is the average growth rate in gross domestic product of country j. Foreign Direct Inv. is the level of foreign direct investment scaled by country j’s GDP. Domestic Credit is the level of credit provided to the public by domestic banks and financial institutions. Savings is the difference between GDP and consumption, scaled by GDP. Investment is the perceived risk facing foreign investors. Law and Order is an index referring to the development of the legal system. Corruption is an index that reflects the level of corruption. X is a vector of lagged firm-specific variables such as cash flow, debt/asset level, risk, profitability, and asset tangibility. I is a vector of industry dummies to control for industry effects and t represents time dummies, which control for any time effects in the panel. Observations are firm year specific and for the term 1996-2005. Firm level control variables are left out for brevity. Robust standard errors clustered around issuer are in brackets. Marginal effects of the variables are provided.

* Significance at the 10% level.

** Idem, 5%. *** Idem, 1%.

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