53 Pages Posted: 28 Nov 2011 Last revised: 28 Jan 2013
Date Written: July 26, 2012
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: Suggested Citation
Ng, Lilian K. 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
By Kevin Murphy