Foreign institutional investors and stock return comovement

Li Jiang,Lei Pang,Jeong-Bon Kim

doi:10.1186/s11782-018-0036-8

Abstract

We investigate whether foreign institutional investors facilitate firm-specific information flow in the global market. Specifically, using annual institutional ownership data from firms across 40 countries, we find that foreign institutional ownership is negatively associated with excess stock return comovement. Our results are more pronounced when foreign institutional investors originate from common-law countries and hold a large equity stake in invested firms; and when the invested firms are located in civil-law countries. Overall, the evidence suggests that foreign institutional investors from countries with strong investor protection play an important informational role in mitigating excess stock return comovement around the world.

Highlights

There has been dramatic growth in foreign institutional investment in global capital markets over the past few decades (Karolyi, 2006)
We investigate whether foreign institutional investors facilitate firm-specific information flows in the global market, thereby mitigating excess stock return comovements
We find that high-stake foreign institutions from common-law countries are the main driver in facilitating firm-specific information flow for firms located in civil-law countries

Summary

Introduction

There has been dramatic growth in foreign institutional investment in global capital markets over the past few decades (Karolyi, 2006). Among foreign institutions, those from countries with strong investor protection (e.g., common-law countries or countries for which the anti-self-dealing index is high) facilitate firm-specific information flow, thereby reducing stock return comovement, to a greater extent, than those from countries with weak investor protection (civil-law countries or countries for which the anti-self-dealing index is low).

Results

Conclusion