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Foreign Investor Heterogeneity and Stock Liquidity Around the World

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

Lilian K. Ng

York University - Schulich School of Business

Fei Wu

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

Jing Yu

University of Western Australia - Department of Accounting and Finance

Bohui Zhang

University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)

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 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

Lilian K. Ng

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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

University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Bohui Zhang (Contact Author)

University of New South Wales (UNSW) - School of Banking and Finance ( email )

Australian School of Business
Sydney NSW, 2052
Australia
61293855834 (Phone)
61293856347 (Fax)

HOME PAGE: http://www.banking.unsw.edu.au/nps/servlet/portalservice?GI_ID=System.LoggedOutInheritableArea&maxWn

Financial Research Network (FIRN)

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

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

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