The stock preferences of domestic versus foreign investors: Evidence from Qualified Foreign Institutional Investors (QFIIs) in China

Abstract

Using a unique dataset, this paper investigates the preferences of, and the stock characteristics in, the domestic and foreign institutional holdings in China, for the period from 2003 to 2014. Results indicate that they have similar preferences on certain stock characteristics, but different towards industry allocations. Results also highlight their differences in corporate governance and stock picking patterns. The panel regression suggests that firms with institutional holdings in the previous period perform better in the following period. This phenomenon is stronger for the domestic holdings, indicating that domestic institutional investors have an edge in stock picking skills over foreign institutional investors. We also conclude that the ownership concentration plays a positive role on firm performances. Our results shed extra light on issues related to the Qualified Foreign Institutional Investors scheme, which contributes largely to the Chinese financial market reform after 2003. The findings have important implications to academics, practitioners, and particularly to policy makers, which enables China to further enhance its financial market liberalization with the rest of the world.