Qualified Foreign Institutional Investors Research Articles

Can Corporate Site Visits Improve ESG Ratings?

AbstractAs environmental, social, and governance (ESG) becomes an increasingly popular criterion for investment screening, drivers of ESG performance have attracted attention from a wide range of stakeholders. In this study, we test whether corporate site visits can improve ESG ratings using a unique dataset of site visits from Chinese listed firms. We find that corporate site visits can lead to improved ESG performance for listed firms, which is robust even after adding a series of control variables, alternative model specifications, and accounting for endogeneity issues. This effect is attributed to the mediating effects of ESG information disclosure and corporate internal control quality. We also find that the more ESG‐related discussion during site visits the better managers learn to improve ESG performance of their firms. Furthermore, there is evidence that the positive effect of site visits on ESG are more pronounced among firms that are not audited by Big Four accounting firms, not cross‐listed, and when Qualified Foreign Institutional Investors are involved. Overall, this paper contributes to the literature by providing complementary evidence that site visits are an important platform for communicating between investors and corporate management, which can have profound implications on incentivizing managers to deliver better ESG performance. Our findings also offer practical and policy implications to regulators on the promotion and implementation of ESG in listed firms.

Influence of Corporate Information Transparency on Foreign Institutional Investors' Shareholding Behavior: Evidence from Public Listed Companies in China

In 2003, China implemented the Qualified Foreign Institutional Investor (QFII) system, which has garnered considerable interest from international institutional investors in the mainland market. As global investors, QFIIs depend significantly on precise, thorough information to bolster their investing criteria. Consequently, the transparency of corporate information becomes a crucial factor for QFIIs. However, due to the relatively late development of the Chinese market, an imbalanced structure of listed companies and information asymmetry, the information disclosure of listed companies has been subject to certain degrees of distortion. Therefore, to better facilitate the development of China's securities market and to help QFIIs fully realize their advanced value investment strategies, this paper aims to study the impact of corporate information transparency on the stockholding behavior of foreign institutional investors. This paper begins by reviewing the literature on the factors influencing institutional investor holdings, corporate transparency, and the characteristics of foreign institutional investors' stockholding. It then defines the concepts of corporate information transparency and foreign institutional investors, analyzes the current state of information transparency in Chinese listed companies, and examines the development of the QFII system in China. The theoretical framework explores the mechanisms through which corporate information transparency influences the stockholding behavior of foreign institutional investors. In the empirical analysis, the paper plans to measure the information transparency of listed companies from three perspectives: earnings quality, information ratings by the Shenzhen Stock Exchange, and the number of analyst followings, to investigate how corporate information transparency influences QFII stockholding behavior.

Правовые аспекты доступа иностранных инвесторов на рынок ценных бумаг Китайской Народной Республики

The People’s Republic of China is the second largest economy in the world. One of the foundations of China’s economic prosperity is a well-developed financial market and, in particular, the securities market. However, the implementation of investments in the Chinese securities market by foreigners is significantly hampered by administrative barriers and direct legislative restrictions. This paper analyzes the legal regime of foreign investment in the securities market of the PRC. The legal regulation of separate legal mechanisms aimed at realization of direct foreign investments in the PRC securities market, such as the status of a qualified foreign institutional investor, as well as exchange and depository links, is researched. The comparative legal aspect assesses the correlation of foreign investment mechanisms in Russia and China and, taking into account the existing characteristics, proposes measures to develop mutually beneficial ways of legal regulation for both countries.

Revolutionizing green business: The power of academic directors in accelerating eco‐innovation and sustainable transformation in China

AbstractThis study investigates the relationship between academic directors and corporate eco‐innovation in Chinese A‐listed firms in the context of the growing urgency of climate change. Based on the argument that academic directors bring advanced knowledge, skills, experience, and expertise to a corporate board and are more socially responsible and ethical, we hypothesized that academic directors would have a positive influence on corporate eco‐innovation. We also examine how this nexus is moderated by pollutant firms and firms having qualified foreign institutional investors (QFIIs). Our results suggest that academic directors have a positive and significant impact on corporate eco‐innovation. The findings remain robust even after employing alternate proxies for both independent and dependent variables, minimizing reverse causality and endogeneity concerns, and addressing self‐selection bias through the entropy balancing method. Additionally, our study reveals that the positive nexus between academic directors and eco‐innovation is more pronounced in pollutant firms and firms having QFIIs. This study contributes to the literature on corporate governance, eco‐innovation, and emerging markets by providing evidence of the positive influence of academic directors on eco‐innovation, highlighting the importance of their contribution to enhancing corporate governance mechanisms to promote environmentally friendly activities and sustainability practices. Furthermore, our findings offer insight into the role of QFIIs in strengthening the positive association between academic directors and eco‐innovation, suggesting that foreign investors can support and encourage firms to adopt environmentally friendly practices for long‐term benefits.

Indifferent to CSR performance? Market liberalization brings about changes

The relationship between stock market performance and corporate social responsibility (CSR) activities indicates the extent of acceptance by investors of such activities. Based on a sample of Chinese-listed companies and a quasi-natural experiment, we explore the impact of an important form of market liberalization—the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect—on the extent of investors' acceptance of CSR using a difference-in-differences approach. The results show that Stock Connect reinforces the favorable correlation between CSR performance and the market response to CSR reports, as well as the positive association between CSR performance and Tobin's Q. This effect is particularly pronounced for nonstate-owned enterprises,firms with lower agency costs, and firms with a lower possibility of using CSR reports for impression management. Thus, market liberalization results in the improved short- and long-term stock market performance of companies with strong CSR records. Further research shows that the benefits of the program are more prominent for companies without Qualified Foreign Institutional Investors (QFII) shareholdings, and the impact of significant foreign ownership through the Stock Connect program on the stock market performance related to CSR engagement is incremental over QFII ownership. The findings support the continuous liberalization of China's capital market.

The effects of institutional investors and their contestability on firm innovation: Evidence from Chinese listed firms

We investigate the effects of institutional investors and their contestability with controlling shareholders on firm innovation. Using a large sample of Chinese listed firms from 2003 to 2017, we find that when the ownership of domestic mutual funds is comparatively larger, their contestability with controlling shareholders is strengthened, which enhances business innovation. However, Qualified Foreign Institutional Investors do not have such significant contestability effects on firm innovation. These results are robust after correction for potential endogeneity issues. Furthermore, the effects of domestic mutual funds' contestability are weaker for short-term mutual funds and quasi-indexers, and for firms where the controlling ownership is higher. The effects of domestic mutual fund contestability are stronger in firms with less analyst coverage. Overall, our findings suggest that the influence of institutional investors is subject to their identities as well as their contestability with controlling shareholders.

Are Chinese B-shares dead? An analysis of price limits on AB-shares on the Shanghai and Shenzhen Stock Exchanges

Firms listed on the Shanghai and Shenzhen Stock Exchanges can simultaneously issue two types of shares: A and B-shares, subject to the same price limits. After July 2003, both Chinese citizens and Qualified Foreign Institutional Investors (QFIIs) were able to trade both A and B-shares in China. Following this regulatory change, some media posts predict that B-share markets will cease to exist in the future. However, are B-shares really dead? Are there no differences at all between these two markets today? In this paper, we will try to answer this question by analysing these two markets with the perspective of price limit efficacy. The rationale behind price limits is to provide investors with a cooling-off period to counter noise trading and alleviate market panic. By applying a truncated-GARCH model that explicitly incorporates the truncation in the distribution of returns that is induced by price limits, we investigate whether price limits have the same effects on price behaviour and volatility on different types of share. In general, A and B-shares enjoy a quite similar pattern in regards to volatility spillover. However, B-shares tend to have more upper price reversal and lower price continuation. This suggests price limits work more efficiently in the B-share market.

The effect of overseas investors on local market efficiency: evidence from the Shanghai/Shenzhen–Hong Kong Stock Connect

Using a recent stock market liberalization reform policy in China—the Stock Connect—as a quasi-natural experiment, this study examines the effect of stock market liberalization on market efficiency. Employing a dataset of 17,086 Chinese listed firms covering 2009 to 2018, we find that stock market liberalization improves the market efficiency of the Chinese mainland stock market. We further explore the potential channels through which the Stock Connect can enhance the efficiency of the A-share (A-shares refer to shares issued by Chinese companies incorporated in mainland China, traded in the Shanghai Stock Exchange and the Shenzhen Stock Exchange. They are denominated in Chinese RMB (the local currency). A-shares were restricted to local Chinese investors before 2003, are open to foreign investors via the Qualified Foreign Institutional Investor, RMB Qualified Foreign Institutional Investor, or the Stock Connect programs.) market. The findings show that liberalizing capital markets could benefit local market efficiency by increasing stock price informational efficiency and improving corporate governance quality. The additional analysis shows that stock market liberalization has a significant and positive impact on local market efficiency, enhancing firm value and reducing stock crash risk. We conduct various robustness checks to corroborate our findings. This study provides important policy implications for emerging countries liberalizing capital markets for foreign investors.

A Liberalization Spillover: From Equities to Loans

AbstractThe opening of equity markets to foreign investment by developing countries appears to generate an enormously large positive growth effect (see Bekaert, Harvey, and Lundblad (2005), Journal of Financial Economics 77, 3–55) in spite of a relatively small role of such markets for financing investment in most economies. We propose a spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China’s introduction of the Qualified Foreign Institutional Investors program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium in loans is an important mechanism.

Does increasing the QFII quota promote Chinese institutional investors to drive ESG?

ABSTRACT This paper assesses whether qualified foreign institutional investors (QFIIs) and domestic institutional investors in China drive the environmental, social, and governance (ESG) performance of firms. We first show that QFII ownership is positively associated with future ESG performance but that domestic institutional ownership is not. We then examine the effect of the increase in QFII investment funds on the decision of domestic institutional investors to drive ESG. We find that with the increase in QFII investment funds, domestic institutional investors start to promote firms to improve future ESG performance, especially domestic institutional investors who have held shares of one same firm as QFIIs at the same time. In particular, funds and security funds are affected by QFIIs, and the effect of institutional ownership is stronger in the ESG categories of corporate governance, workforce diversity and product quality. Overall, our results suggest that QFIIs motivate Chinese institutional investors to drive ESG.

The Moderating Role of Foreign Institutional Investors on Stock Market Volatility: Evidence from China

ABSTRACT Foreign shareholding can result in stock market volatility, especially in immature financial markets. With quarterly data from 1,348 listed companies held by Qualified Foreign Institutional Investors (QFIIs) from 2006 (Q1) to 2020 (Q4), we investigate the dynamic time-varying impact of QFII ownership on China A-share market volatility using an online support vector quantile regression. Our results indicate that QFIIs have an unsystematically destabilizing effect. This effect is asymmetric under different market conditions. QFIIs demonstrate more procyclicality during normal times, and less procyclicality during times of financial stress. The results of network density analysis confirm that volatility risk will stabilize as risk spill-over will decrease when QFIIs gradually expand their shareholdings and strengthen their interconnections in the China A-share market.

Qualified foreign institutional investors and corporate innovation: From the perspective of corporate governance.

Whether qualified foreign institutional investors can effectively play a governance role in the capital market and guide the transformation of corporate innovation from "high-volume and low-quality" to "high-volume and high-quality" is an important issue in the process of foreign capital introduction at the present stage. From the perspective of how QFII shareholding affects the innovation model of firms, this study analyzes the data of China's A-share listed companies from 2007 to 2018 and finds that the shareholding of qualified foreign institutional investors has significantly improved the innovation level of the invested firms, which is reflected in the increase of innovation output and the improvement of innovation quality. The mediating effect shows that QFII shareholding can improve the innovation level of corporates by slowing down insider tunneling of holding companies and increasing the number of analysts to follow, which indicates that QFII is conducive to improving the governance structure of listed companies and improving their qualities. Further research finds that QFII shareholding has a positive impact on corporate efficiency by improving the level of corporate innovation. The above conclusions provide experience and reference for China to further introduce foreign capital.

Restricted shares and CSR: Evidence from foreign strategic investors in China

Using hand-collected ownership data from a large sample of Chinese listed firms, we examine the link between foreign strategic ownership and firms' corporate social responsibility (CSR). We find that foreign strategic ownership is significantly associated with greater CSR performance. The restrictions of shares are the main motivation behind foreign strategic investors (FSIs) increasing firms' CSR engagement. The influence of foreign ownership on CSR is driven by strategic investors with non-tradable shares, but not by Qualified Foreign Institutional Investors (QFIIs) with tradable shares. FSIs with longer restriction horizons and in firms with stronger political connections are found to have more pronounced effects on CSR. We also find FSIs' home country characteristics, including the legal system, cultural background, geographic distance, trade relationship, and economic policy uncertainty, are significant factors in explaining their incentives to increase firm CSR in China. From the perspective of corporate governance, we find that the impacts of FSIs on firms' CSR performance is more pronounced when shareholder power is stronger and executive power is weaker in the firm. Difference-in-differences tests and tests based on instrumental variables provide confirming evidence. Overall, our findings suggest that restricted ownership, political connections, and foreign investors' home country characteristics provide incentives for FSIs to pay more attention to firms' long-term reputation and thus enhance CSR engagement.

In China A-Shares, Big Money Is Smart Money

Using a dataset unique to China, the authors provide evidence that large trades earn excess returns in the China A-shares market. Stocks with net flows through large trades earn positive excess returns in the subsequent month, while stocks with net flows through small trades earn negative excess returns. The predictive power lasts up to two years. Large trades are correlated with institutional holdings by Qualified Foreign Institutional Investors (QFII) and Northbound Stock Connect investors. Moreover, mutual fund returns negatively load on the small net flows factor, suggesting that mutual funds earn their alpha partially from trading against uninformed small retail investors. Small net flows gravitate toward unprofitable, high-valuation, and low-momentum stocks, matching what the literature has found for small retail trader preference. Lastly, small- and medium-sized net flows predict negative subsequent profitability, while large and extra-large net flows predict positive subsequent profitability.

How do institutional investors influence accounting conservatism in China?

AbstractUsing a sample of Chinese listed firms from 2003 to 2015, we find that domestic mutual funds have negative effects while qualified foreign institutional investors (QFIIs) have positive effects on firm accounting conservatism. These effects become stronger when their ownerships are closer to that of the controlling shareholder, respectively. Furthermore, these results are more pronounced when institutional investors are more able to monitor managers and compete with controlling shareholders. Our findings suggest that the influence of institutional investors on accounting conservatism in China is subject to their identities as well as the control contestability against the controlling shareholders.

The influence of foreign institutional investors on audit fees: evidence from Chinese listed firms

ABSTRACT This study examines the influence of qualified foreign institutional investors (QFIIs) on investee companies’ audit fees. Using data from China, we find that ownership by QFII-licensed investors is positively associated with audit fees. Besides, audit fees are higher in companies with QFIIs than in those without, and the demand for more extensive audits increases with the number of QFIIs. Notably, the demand for more extensive auditing procedures is mainly attributable to QFIIs from jurisdictions with strong governance institutions or is driven by QFIIs from jurisdictions that are geographically distant from China. Our cross-sectional analysis reveals that this positive influence is more prominent when investee companies exhibit lower earnings quality or a weak sense of corporate social responsibility. Finally, our mediation analysis suggests that QFIIs can enhance firm value and that a portion of this effect is due to the increased audit effort driven by QFIIs.

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

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.

Institutional environment and qualified foreign institutional investors' trust in auditing

Even though corporate governance is a channel for qualified foreign institutional investors (QFIIs) to mitigate information asymmetry and is essential in substituting for poor institutional quality in the host countries of QFIIs, systematic evidence is scanty due to the challenge of capturing institutional quality changes in the host country. Thus, this study examines how improvements in country-level institutional quality affect QFIIs' trust in a firm's audit quality. Using a propensity score matching method, we found that after the 2013 anti-corruption reform improved the institutional quality level in China, Chinese firms without an audit committee experienced a sharp increase in QFII ownership relative to their peers. This finding is more pronounced in regions where the government exerted more effort in combating corruption. Our findings provide supporting evidence that the improvement in institutional quality increases QFIIs' trust in the audit quality, thereby decreasing their reliance on the audit committee as an internal corporate governance mechanism.

Does stock market liberalisation restrain corporate financialisation?

AbstractWe study the impact of stock market liberalisation through the Mainland China–Hong Kong Stock Connect (CHSC) program on the corporate financialisation of listed firms in Mainland China using the generalised difference‐in‐difference model in this paper. The empirical results show that implementing the CHSC program significantly reduces corporate financialisation of the listed firms in Mainland China by mitigating internal agency conflicts and enhancing external monitoring. Further analysis indicates that the inhibiting effect of stock market liberalisation through the CHSC program on corporate financialisation is more pronounced for firms without cross‐listing or qualified foreign institutional investors (QFII) ownership and firms with a more remarkable change of foreign ownership brought by the CHSC program.

The influence of qualified foreign institutional investors on internal control quality: Evidence from China

This study aims to investigate whether qualified foreign institutional investors (QFIIs) improve companies' internal control quality to mitigate information asymmetry. By analysing a sample of 22,310 firm-year observations from Chinese listed companies between 2005 and 2017, we found that companies with QFIIs exhibit higher internal control quality and fewer internal control deficiencies. In particular, higher QFII ownership is associated with higher quality of internal control. Interestingly, QFIIs from high-governance-quality countries are more likely to improve the internal control system of their investee companies. Finally, the improvement in internal control quality attributed to QFIIs leads to better operating performance. Our results are robust to alternative measures of QFIIs, alternative proxies for internal control quality, and various controls for endogeneity issues.