A Tale of Two Styles: Do Qualified Foreign Institutional Investors Have an Edge Over Domestic Funds Managers in China?

Abstract

Using a unique quarterly dataset on equity ownership, we investigate Domestic Funds’ and Qualified Foreign Institutional Investors’ (QFIIs) ownership characteristics in the Chinese equity market. Results suggest that both domestic funds and QFIIs tend to hold big firms, firms with relatively higher transaction costs, firms with better accounting performances, firms with higher B/M ratios and higher price to cash flow ratios. Meanwhile, they both hold firms with relative lower P/E ratios, lower betas, and lower price to sales ratios. The performances of both domestic funds and QFIIs holdings are relatively lower than the overall market, when measured by Tobin’s Q. Domestic funds also tend to hold firms with relatively higher turnovers, higher current and quick ratios, and lower firm ages. However, QFIIs tend to hold firms with relatively lower turnovers, lower current and quick ratios, but higher firm ages. We find that domestic and foreign institutional investors have similar preferences towards industry allocations for their holdings. We also observe that foreign institutional investors prefer stocks with higher ownership concentration. Our regression analysis indicates that firms held by domestic funds mangers or QFIIs in the previous period do perform better in the following period. This phenomenon is stronger for domestic funds holdings, suggesting that domestic mangers do have an edge over foreign institutional investors. Our results also demonstrate that the state ownership has been inefficient in terms of firms’ performances, but the ownership concentration and firm’s tangibility do have positive impacts on firms’ performances.