Overseas Monitors in Emerging Financial Markets: Evidence from Foreign Ownership in Taiwan

61 Pages Posted: 19 Jan 2006

See all articles by Roger D. Huang

Roger D. Huang

University of Notre Dame

Cheng-Yi Shiu

National Central University at Taiwan - Department of Finance

Date Written: October 2005

Abstract

The literature on foreign portfolio ownership in developed markets suggests that investors minimize their informational disadvantage when making foreign investments. We examine Taiwan, an emerging financial market where news of foreign institutional portfolio ownership is closely and widely scrutinized by the market participants. Our empirical analyses reveal that foreign institutions have pronounced valuation effects in Taiwan. We find a startling foreign ownership effect whereby stocks with high foreign ownership outperform stocks with low foreign ownership. Although foreigners tend to own export-oriented and large firms, the foreign ownership effect is present even after controlling for exports, size, or transparency levels. Foreign portfolio ownership is also strongly and positively associated with firm performance. Finally, foreign investment levels can explain the performance of long-term foreign investment flows. Our formal empirical results and market observations are consistent with foreign institutions that use their informational advantage to select and invest in local stocks and to monitor them afterwards.

Keywords: Foreign Ownership, Monitor, Information Advantage, Emerging Markets

JEL Classification: G14, G15, G39

Suggested Citation

Huang, Roger D. and Shiu, Cheng-Yi, Overseas Monitors in Emerging Financial Markets: Evidence from Foreign Ownership in Taiwan (October 2005). Available at SSRN: https://ssrn.com/abstract=875365 or http://dx.doi.org/10.2139/ssrn.875365

Roger D. Huang (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6370 (Phone)

Cheng-Yi Shiu

National Central University at Taiwan - Department of Finance ( email )

No. 300, Jhongda Rd, Jhogli City, Taoyuan, Taiwan,
Jhongli, TY 32001
Taiwan

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