International Portfolio Choice and Corporation Finance: A Synthesis

The article discusses international portfolio choice and corporation finance. In portfolio theory, two avenues have so far been explored in an attempt to capture the international dimension. Most of the recent literature has been devoted to models where nations are defined as zones of a common purchasing power unit or, more precisely, as subsets of investors who use the same price index in deflating their anticipated monetary returns. In practice, nations may further be separated by such manifestations of such sovereignty as taxes and border controls which constrain private financial transactions between countries. Financial economic theory does not deal easily with such imperfections which tend to segment international capital markets. Nations can meaningfully be distinguished by Purchasing Power Parity deviations. It is therefore reasonable to suppose that investors residing in different countries have different yardsticks for measuring real returns and their risks. Consequently, one would expect the compositions of their portfolios also to differ.