Do Local Investors Always Know Better? Evidence from China’s Market Segmentation

Accounting Horizons: March 2019

51 Pages Posted: 1 Aug 2019

See all articles by Sean Cao

Sean Cao

Georgia State University - J. Mack Robinson College of Business

Tao Ma

Texas Tech University

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance

Date Written: September 2, 2018

Abstract

It is well documented that domestic investors have an information advantage over foreign investors. We utilize the market segmentation of Chinese A- and B-shares to disentangle the information sets of domestic versus foreign investors. We find that, while domestic investors lead foreign investors in firm-specific information, the latter is better at incorporating macro-level information into stock prices. Thus, our results indicate that, in contrast to conventional beliefs, foreign investors are not at an absolute information disadvantage in emerging markets. In addition, we find that domestic investors’ firm-specific information advantage is weakened among firms that have higher accounting quality and in situations where foreign investors face fewer cultural and communication barriers. Taken together, our paper indicates the key information role played by foreign investors and the importance of financial reporting in emerging markets.

Keywords: information advantage; domestic investors; foreign investors; Chinese stock market

Suggested Citation

Cao, Sean S. and Ma, Tao and Wan, Chi, Do Local Investors Always Know Better? Evidence from China’s Market Segmentation (September 2, 2018). Accounting Horizons: March 2019. Available at SSRN: https://ssrn.com/abstract=3428188

Sean S. Cao (Contact Author)

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

Tao Ma

Texas Tech University ( email )

Box 42101
Lubbock, TX 79409-2101
United States

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance ( email )

Boston, MA 02125
United States

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