Foreign Portfolio Investment and Stock Price Informativeness: Evidence from the Shanghai-Hong Kong Stock Connect
64 Pages Posted: 28 Nov 2016 Last revised: 5 Dec 2017
Date Written: December 4, 2017
We study how foreign portfolio investment affects the flow of firm-specific information to the market. We find lower synchronicity (R2) for foreign-invested stocks than stocks without foreign portfolio capital. Exploiting the stock market segmentation between China and Hong Kong we present evidence consistent with the “informed trading” explanation but not the “bonding” or “governance” hypotheses. Causal evidence comes from a pilot linkage program in 2014 removing the trading frictions on selected stocks at Shanghai Exchange for Hong Kong investors in a difference-in-differences set-up. This article informs emerging markets the conditions under which foreign portfolio capital improves stock price informativeness.
Keywords: foreign ownership, R2, Shanghai-Hong Kong Stock Connect, informed trading
JEL Classification: G14, G15, G38
Suggested Citation: Suggested Citation