Do Foreign Institutional Investors Improve Price Efficiency?

100 Pages Posted: 6 May 2020

See all articles by Marcin T. Kacperczyk

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; Centre for Economic Policy Research (CEPR)

Savitar Sundaresan

Imperial College Business School

Tianyu Wang

School of Economics and Management, Tsinghua University

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2019

Abstract

We study the impact of foreign institutional investors on price efficiency with firm-level international data. Using MSCI index inclusion and the U.S. Jobs and Growth Tax Relief Reconciliation Act as exogenous shocks to foreign ownership, we show that greater foreign ownership increases stock price informativeness, especially in developed economies. This increase arises from new information that foreign investors bring in, and displacement of less informed domestic retail investors. Finally, we show that foreign ownership, particularly from active investors, increases market liquidity, reduces firms' cost of equity, and increases firms' real investment growth.

Keywords: Institutional Investors, Global Capital Flow, Price Efficiency, Welfare

JEL Classification: G14, G15, G23

Suggested Citation

Kacperczyk, Marcin T. and Sundaresan, Savitar and Wang, Tianyu, Do Foreign Institutional Investors Improve Price Efficiency? (December 10, 2019). Available at SSRN: https://ssrn.com/abstract=3141866 or http://dx.doi.org/10.2139/ssrn.3141866

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Savitar Sundaresan

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Tianyu Wang (Contact Author)

School of Economics and Management, Tsinghua University ( email )

Shuangqing Road 30
Haidian District
Beijing, Beijing SW7 2AZ
China

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