Do Foreign Investors Improve Market Efficiency?

67 Pages Posted: 6 Jul 2018

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

Tsinghua University

Multiple version iconThere are 2 versions of this paper

Date Written: June 2018

Abstract

We study the impact of foreign institutional investors on global capital allocation and welfare using novel firm-level international data. Using MSCI index inclusion as an exogenous shock to foreign ownership, we show that greater foreign ownership leads to more informative stock prices and this effect arises more from increased price efficiency than from improved firm governance. We further show that the impact of capital flows on price efficiency is due to real efficiency gains, as opposed to better information disclosure. Finally, we show that foreign ownership increases market liquidity, reduces firms' cost of equity, and leads to subsequent growth in their real investments, thus improving overall welfare.

Suggested Citation

Kacperczyk, Marcin T. and Sundaresan, Savitar and Wang, Tianyu, Do Foreign Investors Improve Market Efficiency? (June 2018). NBER Working Paper No. w24765, Available at SSRN: https://ssrn.com/abstract=3206439

Marcin T. Kacperczyk (Contact Author)

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

Tsinghua University ( email )

Beijing, 100084
China

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