Foreign Investor Heterogeneity and Stock Liquidity Around the World

53 Pages Posted: 28 Nov 2011 Last revised: 28 Jan 2013

See all articles by Lilian Ng

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Jing Yu

The University of Sydney; Financial Research Network (FIRN)

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: July 26, 2012

Abstract

This paper examines whether foreign investor heterogeneity plays a role in stock liquidity on a sample of 27,976 firms from 39 countries. Results show that foreign direct ownership is negatively, while foreign portfolio ownership is positively, associated with various measures of stock liquidity. Furthermore, during the 2008 market downturn, liquidity also worsens more (less) in firms with larger foreign direct investment FDI (foreign portfolio investment, FPI). Consistent with theoretical predictions, our results also show that foreign investors influence stock liquidity through both trading activity and information channels. Our findings also indicate that the presence of FDI investors improves firm valuation and operating performance even at the expense of an increase in the firm's cost of capital, suggesting that the value-enhancing benefits from FDI investors' monitoring efforts outweigh the liquidity costs and high adverse selection premium demanded by less informed investors. In contrast, the positive impacts of FPI ownership on firm performance, as previously documented in existing literature, becomes negative and also are not robustly significant after controlling for liquidity.

Keywords: Foreign Investors, Stock Liquidity, Cost of Capital, Firm Performance

JEL Classification: G11, G12, G23

Suggested Citation

Ng, Lilian and Wu, Fei and Yu, Jing and Zhang, Bohui, Foreign Investor Heterogeneity and Stock Liquidity Around the World (July 26, 2012). Asian Finance Association (AsFA) 2013 Conference, Available at SSRN: https://ssrn.com/abstract=1965021 or http://dx.doi.org/10.2139/ssrn.1965021

Lilian Ng

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Jing Yu

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Bohui Zhang (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
394
Abstract Views
4,472
rank
91,526
PlumX Metrics