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Foreign Institutional Investment, Ownership, and Liquidity : Real and Informational Frictions

Ding, Mingfa LU ; Nilsson, Birger LU and Suardi, Sandy (2017) In Financial Review 52(1). p.101-144
Abstract

The literature widely documents the negative liquidity impact of foreign participation in firms that permit high foreign institutional ownership. This paper employs a unique setting for the limited participation of qualified foreign institutional investors (QFIIs) in China's A-share market and examines how this impacts on stock liquidity in emerging markets. Contrary to the findings in the literature, foreign investor participation helps enhance the liquidity of affected stocks by promoting trade activities and price discovery. The improvement in liquidity does not occur through the information friction channel, but rather the real friction channel. Our results are robust to endogeneity issue and the possible influence of the global... (More)

The literature widely documents the negative liquidity impact of foreign participation in firms that permit high foreign institutional ownership. This paper employs a unique setting for the limited participation of qualified foreign institutional investors (QFIIs) in China's A-share market and examines how this impacts on stock liquidity in emerging markets. Contrary to the findings in the literature, foreign investor participation helps enhance the liquidity of affected stocks by promoting trade activities and price discovery. The improvement in liquidity does not occur through the information friction channel, but rather the real friction channel. Our results are robust to endogeneity issue and the possible influence of the global financial crisis, industry effects and the stock exchange. Further, the liquidity improving effects of QFII are even stronger when the analysis is performed on a subsample of QFII firms.

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Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
foreign institutional investor, informational friction, liquidity, QFII, real friction
in
Financial Review
volume
52
issue
1
pages
44 pages
publisher
Wiley-Blackwell
external identifiers
  • scopus:85009387014
ISSN
0732-8516
DOI
10.1111/fire.12126
language
English
LU publication?
yes
id
96ca6754-ecaf-40f8-ae6a-bddd409cba92
date added to LUP
2017-02-06 07:58:47
date last changed
2018-01-14 04:29:44
@article{96ca6754-ecaf-40f8-ae6a-bddd409cba92,
  abstract     = {<p>The literature widely documents the negative liquidity impact of foreign participation in firms that permit high foreign institutional ownership. This paper employs a unique setting for the limited participation of qualified foreign institutional investors (QFIIs) in China's A-share market and examines how this impacts on stock liquidity in emerging markets. Contrary to the findings in the literature, foreign investor participation helps enhance the liquidity of affected stocks by promoting trade activities and price discovery. The improvement in liquidity does not occur through the information friction channel, but rather the real friction channel. Our results are robust to endogeneity issue and the possible influence of the global financial crisis, industry effects and the stock exchange. Further, the liquidity improving effects of QFII are even stronger when the analysis is performed on a subsample of QFII firms.</p>},
  author       = {Ding, Mingfa and Nilsson, Birger and Suardi, Sandy},
  issn         = {0732-8516},
  keyword      = {foreign institutional investor,informational friction,liquidity,QFII,real friction},
  language     = {eng},
  month        = {02},
  number       = {1},
  pages        = {101--144},
  publisher    = {Wiley-Blackwell},
  series       = {Financial Review},
  title        = {Foreign Institutional Investment, Ownership, and Liquidity : Real and Informational Frictions},
  url          = {http://dx.doi.org/10.1111/fire.12126},
  volume       = {52},
  year         = {2017},
}