Foreign Investor Heterogeneity and Stock Liquidity Around the World
Lilian K. Ng
York University - Schulich School of Business
Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)
University of Western Australia - Department of Accounting and Finance
University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)
July 26, 2012
Asian Finance Association (AsFA) 2013 Conference
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.
Number of Pages in PDF File: 53
Keywords: Foreign Investors, Stock Liquidity, Cost of Capital, Firm Performance
JEL Classification: G11, G12, G23
Date posted: November 28, 2011 ; Last revised: January 28, 2013
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