Investment Restrictions and the Pricing of Korean Convertible Eurobonds

Corporations in developing countries with foreign investment restrictions have begun to issue convertible bonds overseas. Given low covariance of emerging market equity returns with global economic risks, foreign investors should place a relatively high value on these bonds. We use price data for convertible Eurobonds of four Korean corporations to measure the implicit premium foreigners offer for Korean equities relative to prices in the domestic Korean stock market. We find large, volatile premiums which vary widely across firms and differ from the premium on the closed-end Korea Fund listed on the New York Stock Exchange, particularly after foreign access to the Korean stock market was liberalized. Our results have several implications for the pricing of emerging market securities