Local and foreign institutional investors, information asymmetries, and state ownership

Abstract

Extant evidence is mixed on whether local investors or foreign investors are better informed. In this study, we shed light on this debate by investigating whether the information asymmetries between local and foreign institutional investors relate to state ownership of publicly listed firms. Prior research documents that state ownership is associated with worse information asymmetry stemming from poor governance structures and financial transparency, implying that investing in firms with state ownership requires more local knowledge and experience. In analyzing Chinese listed firms, we find strong, robust evidence that the information advantage of local versus foreign institutional investors varies with the extent of state ownership: in partially state-owned enterprises (SOEs), local institutional investors have an advantage over foreign institutional investors in predicting future stock returns, whereas this local advantage does not extend to firms with zero state ownership (non-SOEs). In additional analysis, we find evidence that local institutional investors' information advantage in SOEs narrows in the presence of highly independent boards and Big Four auditors.