The Impact of CEOs’ Social Capital on China’s Qualified Foreign Institutional Investors’ Holdings

Abstract

ABSTRACT The phenomenon of underinvestment in foreign equity securities is widely acknowledged as equity home bias. Relying on China’s sociological characteristics to explain this equity home bias, this research investigates whether CEOs’ social capital is a factor affecting the investment decisions of qualified foreign institutional investors (QFIIs). The empirical results show that CEOs’ elite university network (i.e., CEOs’ elite networks from the top 2 universities in China – Peking University & Tsinghua University) are significantly negatively related to QFIIs’ holdings whereas CEOs’ political connections (i.e., CEOs’ formal position interlock & political background) are significantly positively related to QFIIs’ investment. The findings also show that QFIIs prefer to invest in cross-listed firms with higher capitalization and enhanced performance. Our research confirms the central view of social capital theory that social networks have value, but also supplements the literature by finding that social capital may have greater benefit for CEOs rather than shareholders.