The Investment Behavior of Qualified Foreign Institutional Investors in China

Abstract

Using data from Chinese listed firms, this paper examines the investment behavior of Qualified Foreign Institutional Investors (QFIIs). QFIIs have a preference for large well known firms with some element of state ownership, lower liability levels and greater turnover capacity. Furthermore, the presence of QFIIs in Chinese firms is associated with better levels of corporate operating performance. We show that this positive relationship is more pronounced, the deeper the international investors commitment, in terms of investment size and horizon. Our results highlight the heterogeneity of foreign institutional investors and provide evidence to support the view that foreign institutional investors in emerging markets provide an important source of managerial oversight. Our results are particularly noteworthy given all QFII’s in China represent small investors, with shareholdings below blockholder thresholds.

Keywords: Qualified Foreign Institutional Investors, Investor Heterogeneity, Investment Preference, Shareholder Activism

JEL Classification: G11, M41, G29