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

See all articles by Zhen Lei

Zhen Lei

Hong Kong Polytechnic University

Haitian Lu

Hong Kong Polytechnic University

Date Written: December 4, 2017

Abstract

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

Lei, Zhen and Lu, Haitian, Foreign Portfolio Investment and Stock Price Informativeness: Evidence from the Shanghai-Hong Kong Stock Connect (December 4, 2017). Available at SSRN: https://ssrn.com/abstract=2875633 or http://dx.doi.org/10.2139/ssrn.2875633

Zhen Lei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Haitian Lu (Contact Author)

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom
Hong Kong

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