Qualified foreign institutional investor ownership deregulation and the restatement of financial reports --- empirical findings from Taiwan

Abstract

This study examines the monitoring role of qualified foreign institutional investors (QFIIs) on a financial misreporting by Taiwanese firms and whether this role has changed since the deregulation of QFII ownership restrictions. Empirical results reveal that, prior to deregulation, QFII ownership was negatively associated with the probability of financial report restatement, but this association disappeared in the post-deregulation period. Thus, the deregulation likely attracted a wide range of institution types (e.g., short-term oriented trading institutions) to engage in Taiwan's stock market, and this change in the composition of foreign institutions generally weakened the monitoring role of QFIIs to prevent financial misreporting. Further analysis documents that this result is more pronounced for firms with higher degrees of QFII ownership and lower shareholding volatility. The results are robust to various model specifications.