Foreign ownership and firm-level stock return volatility in Taiwan

Yi-Chein Chiang,Ming-Han Chan

doi:10.21511/imfi.14(3-1).2017.10

Yi-Chein Chiang, Ming-Han Chan

Open Access

https://doi.org/10.21511/imfi.14(3-1).2017.10

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Abstract

With the increasing presence of foreign investors and their importance in the stock markets, the authors investigate the effects of foreign ownership on stock return volatility by using Taiwanese firm-level data covering a period from 1994 to 2014. The results demonstrate that foreign ownership is negatively correlated with stock return volatility during the whole sample period, the so-called stabilizing effect. For the sub-sample test, this effect is the largest during the period 2002–2007, the years following Taiwan joins WTO. However, the stabilizing effect did not exist after the global financial crisis in 2008 and recent years. The results are also robust after correcting the potential endogeneity issue.

Highlights

With the continuation of economic and financial liberalization in the world, the participation by foreign investors in the local market has increased over the years, as discussed and shown in a large amount of literature
The results demonstrate that foreign ownership is negatively correlated with stock return volatility during the whole sample period, the so-called stabilizing effect
With the increasing importance of foreign investors in Taiwan stock markets, this study investigates whether foreign ownership would affect a firm’s stock return volatility by using firm-level data covering a period from 1994 to 2014

Summary

Introduction

With the continuation of economic and financial liberalization in the world, the participation by foreign investors in the local market has increased over the years, as discussed and shown in a large amount of literature. Many countries open their capital markets and allow foreign investors to participate for some purposes such as to increase the supply of capital, reduce the cost of capital and finance economic growth (Bekaert & Harvey, 2000; Bekaert et al, 2001; Ramaswamy & Li, 2001; Li, Nguyen, Pham, & Wei, 2011), and ensure liquidity and efficiency of these markets (Bekaert & Harvey, 2000). On the other hand, Li, Nguyen, Pham, and Wei (2011), Wang (2013) and Vo (2015) document a negative impact of foreign ownership on firmlevel stock return volatility

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Results

Conclusion