Domestic and Foreign Institutional Investor Behavior in China

45 Pages Posted: 15 Mar 2011

See all articles by Ningyue Liu

Ningyue Liu

University College Dublin (UCD)

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance

Liming Wang

University College Dublin (UCD)

Zhihong Yi

Renmin University of China

Date Written: March 14, 2011

Abstract

This paper compares different preferences between foreign funds operating under Qualified Foreign Institutional Investor (QFII) in China and domestic Chinese funds and analyzes the firm-level drivers that influence their allocation choices. The analysis reveals that foreign funds have a preference for a range of sectors such as transportation, metals & non-metals, and machinery, as opposed to industries with a requirement for local knowledge. The portfolios of domestic Chinese funds are distributed more evenly across sectors, compared to foreign funds. The comparative analysis reveals that the companies foreign funds invest in are significantly different from those firms favored by domestic funds in terms of size, profit and compensation of management. Finally, we find that when making investment decisions, domestic funds tend to emphasize on some basic financial indicators, e.g. size and long-term liabilities paying capability rather than corporate governance structure of a firm. In contrast, however, QFIIs emphasize on financial characteristics, e.g. free cash flow as well as corporate governance structure, e.g. compensation of management. These empirical findings highlight the differences between QFIIs’ and domestic funds investment preferences, and have implications for policy makers aiming to attract foreign investors to invest in emerging markets.

Keywords: Qualified Foreign Institutional Investor, Corporate Governance, China Stock Market

JEL Classification: G11, G34

Suggested Citation

Liu, Ningyue and Bredin, Don and Wang, Liming and Yi, Zhihong, Domestic and Foreign Institutional Investor Behavior in China (March 14, 2011). Available at SSRN: https://ssrn.com/abstract=1785890 or http://dx.doi.org/10.2139/ssrn.1785890

Ningyue Liu (Contact Author)

University College Dublin (UCD) ( email )

Belfield
Belfield, Dublin 4 4
Ireland

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance ( email )

School of Business
Blackrock, Co. Dublin, 4
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff_bredin.html

Liming Wang

University College Dublin (UCD) ( email )

Belfield
Belfield, Dublin 4 4
Ireland

Zhihong Yi

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

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