Domestic and Foreign Institutional Investor Behavior in China: Financial Characteristics and Corporate Governance

Abstract

Purpose – We study the investment behavior of foreign institutional investors operating in China. A detailed analysis of foreign institutional investors is examined, along with a comparison of domestic Chinese investors. Methodology/approach – We adopt annual Chinese stock market data for the period 2003–2009 for both foreign and domestic funds to analyze the industrial preference of foreign funds and compare the different preferences between foreign funds and domestic Chinese funds in relation to financial characteristic and corporate governance indicators. Findings – The analysis reveals that foreign funds have a preference for a range of sectors such as transportation, metals and nonmetals, and machinery, as opposed to industries with a requirement for local knowledge. The portfolios of domestic Chinese funds are distributed more evenly across sectors, compared to foreign funds. The comparative analysis reveals that the companies foreign funds invest in are significantly different from those firms favored by domestic funds in terms of size, profit, and management compensation. Social implications – These empirical findings highlight the differences between foreign and domestic funds investment preferences and has implications for policy makers aiming to attract foreign investors to emerging markets. Originality/value of chapter – Our chapter not only provides an introduction on the QFII scheme in China, but also examines the impact of a comprehensive range of firm-level characteristics, financial and corporate governance indicators, on the investment decisions of foreign and domestic funds in emerging markets.