Qualified Foreign Institutional Investors Research Articles

Key Channels for Foreign Investors to Enter into China

To invest in China, foreign investors usually choose to set up a foreign-invested enterprise, foreign-invested investment company, foreign-invested venture capital investment enterprise or qualified foreign limited partnership or they gain access thanks to the status of qualified foreign institutional investors or renminbi-qualified foreign institutional investors. As the Chinese government continues opening up its policies, foreign investments are expected to be subject to fewer restrictions and foreign investors to be able to enjoy more flexibility in China.

The impact of board gender diversity and foreign institutional investors on firm innovation: evidence from China

PurposeThis study investigates the impact of board gender diversity and foreign ownership on innovation in Chinese firms.Design/methodology/approachThe authors use data for Chinese manufacturing firms listed on the Shanghai and Shenzhen stock exchanges, for a sample over the period 2008–2017. Ordinary least square (OLS) is used as the baseline methodology, with cluster OLS, two-stage Heckman test, Blau index and Shannon index used to address endogeneity issues.FindingsThe results show that gender diversity on the board has a positive effect on corporate innovation as measured by the total number of patent applications, invention patent applications, utility model patent applications and design patent applications. Our findings also provide support for the critical mass participation of female directors on the board being associated with more innovation. They also reveal that innovation output does not vary across state-owned enterprises (SOEs) and non-SOEs. These outcomes reveal that SOEs' advantages, such as easy access to funding and more support of government, are likely offset by their disadvantages, such as different goals and having more agency issues. Because of intense political power and networks in Chinese firms, qualified foreign institutional investors (QFIIs) are less motivated to enhance innovation activities.Practical implicationsThis study highlights the role of board gender diversity in enhancing innovation among Chinese manufacturing firms. Our findings provide support for regulatory bodies' role regarding women's participation on the board.Originality/valueThis research adds to literature by addressing the largely ignored questions of whether providing a gender-diverse board enhances innovation, whether critical mass participation has a greater effect on improving firm innovation and whether the influence of women directors varies with ownership structure.

How Foreign Institutional Shareholders' Religious Beliefs Affect Corporate Social Performance?

In this paper, we employ the unique qualified foreign institutional investors (QFII) scheme in China to investigate whether and how the different religious beliefs in the areas where foreign institutional shareholders from are associated with the corporate social responsibility (CSR) performance of domestic firms. After controlling for other determinants, we find robust evidence that firms with QFII investors from areas with stronger religious beliefs have better CSR performance than those that do not have these beliefs'. This association is more pronounced when a QFII has a shorter holding period, has a relatively large ownership in the firm, or is a more committed investor in China. The above moderating results show that the stock preference may be a channel through which religious QFIIs affect firms’ CSR performance. Our paper contributes to the growing body of literature on CSR and on the effects of investors’ religious beliefs. It also offers useful guidance to listed companies, institutional investors, regulators, and other stakeholders.

Equity concentration and investment efficiency of energy companies in China: Evidence based on the shock of deregulation of QFIIs

This paper empirically tests the impact of equity concentration on the investment efficiency of Chinese energy companies based on the shock that the shareholding ratio restriction of qualified foreign institutional investors (QFIIs) is relaxed. We find that equity concentration significantly improves energy companies' investment efficiency in China. Equity concentration affects the investment efficiency by influencing the first type of agency cost and the information environment. Equity concentration plays a significant role in improving the investment efficiency when the decision-making power is decentralized while the external environment is complex. • First, the exogenous reduction of equity concentration is not conducive to energy companies' grasp of investment opportunities. • Second, high equity concentration improves the investment efficiency of energy companies. • Third, equity concentration affects the investment efficiency by influencing the first type of agency cost and the information environment. • Four, due to the internal decision-making power and the external environment, the relationship between equity concentration and energy companies' investment efficiency is different.

Do foreign institutional investors drive corporate social responsibility? Evidence from listed firms in China

AbstractThis paper investigates the effect of qualified foreign institutional investors (QFIIs) on corporate social responsibility (CSR) within the context of listed firms in China. We find that QFIIs offer an incisive channel for improving socially responsible practices. In addition, we find that firms with QFIIs are more likely to comply with the Global Reporting Initiative (GRI) guidelines, and that their sustainability reports tend to be longer. We also find that this positive effect is more pronounced in firms with low initial CSR scores than those with high CSR scores at the time when QFIIs enter the sample. Our empirical evidence further confirms that this positive impact is driven by QFIIs from countries with high social awareness, or QFIIs from geographically distant countries, consistent with their motives, and is linked to the ownership of QFIIs, especially when the QFII is among the top ten of the largest shareholders. Finally, our extended analysis reveals that the increase in CSR performance associated with the presence of QFIIs results in greater firm performance and easier access to finance.

Stock market liberalization, foreign institutional investors, and informational efficiency of stock prices: Evidence from an emerging market

AbstractThis study investigates the effects of investments by qualified foreign institutional investors (QFIIs) on the informational efficiency of stock prices in Chinese A‐share stock markets. Employing a large sample of listed firms from 2004 to 2012, we document a significant and positive relationship between stock price informativeness and stock ownership by foreign institutional investors. We also use the instrument‐variable approach, propensity‐score matching method, as well as an alternative measure of informational efficiency to ensure the robustness of our findings. We document that the effects of foreign ownership on informational efficiency is stronger for firms with lower levels of assets intangibility and in regions with less developed institutions. In addition, we document that the effects of foreign ownership on informational efficiency is more pronounced when QFIIs have better local information and more incentives to monitor.

Does CSR reporting matter to foreign institutional investors in China?

This study empirically examines how the mandatory reporting of corporate social responsibility (CSR) affects the investment behavior of foreign institutional investors as measured by Qualified Foreign Institutional Investors (QFIIs) in China. Our analysis uses difference-in-differences (DiD) design by exploring the enactment of China’s 2008 CSR mandatory disclosure requirement. The results show that firms with mandatory CSR reporting undergo an increase in their QFII ownership percentage. Local institutional investors’ ownership and investment weight relative to the market portfolio also increased following the mandate for firms to provide CSR reporting. We find some evidence that QFIIs from common-law countries may invest more in firms with CSR reporting when compared with QFIIs’ full portfolio and QFIIs from code-law countries. Overall, our study provides practical guidance on the impact of nonfinancial information, indicating that CSR reporting can help firms in China to improve their information environment and attract international and local institutional shareholders.

Valuation effect of capital account liberalization: Evidence from the Chinese stock market

This paper examines the valuation effect of capital account liberalization. Using an event study approach and the policy announcement for RMB Qualified Foreign Institutional Investors (short for RQFII) as the event date, we find that overall, the stock market responded positively to the capital account liberalization announcement. In addition, we provide some heterogeneity that firms with more stringent financing constraints earn higher returns than their counterparts. Finally, existing local institutions play an important role in determining announcement returns.

Can foreign equity funds outperform their benchmarks? New evidence from fund-holding data for China

We investigate whether foreign institutional investors can outperform domestic benchmarks. Using portfolio holding-based approaches for the Chinese Qualified Foreign Institutional Investors (QFIIs), we identify fund’s active manager opinions and information on the future value of stocks. We find stocks actively traded by QFIIs, and stocks with higher deviation from benchmarks (DFB) outperform their benchmarks in the subsequent one to three quarters. Such “hot hand” phenomenon is driven by foreign institutions’ investment skill in incorporating stale information rather than fresh information into asset pricing. Our findings shed new light on the roles of foreign equity funds in eliminating mispricing in emerging markets, and provide evidence on rethinking the role of financial intermediation in a capital-controlled economy.

The Impacts of Policy Infrastructures on the International Use of the Chinese Renminbi

Despite burgeoning research on the internationalization of the Chinese renminbi, there has been surprisingly little systematic analysis of how the renminbi is actually used in foreign markets. This study provides a cross-country analysis of renminbi use in offshore foreign exchange markets, with special attention to the effects of the cooperative policy measures adopted by China and foreign states to promote the renminbi’s international use. We find that a country’s participation in the Renminbi Qualified Foreign Institutional Investor scheme (which expands its renminbi investment opportunities) and its establishment of an offshore renminbi clearing bank (which provides better renminbi payment services), but not its entry into a renminbi–local currency swap agreement, facilitate use of the renminbi in its foreign exchange markets. States have played a significant role in the rise of the renminbi as a newly internationalizing currency.

Misinformation corrections of corporate news: Corporate clarification announcements

We study the effect of decision making through misinformation correction of financial news through corporate clarification announcements. We adopt the quantile regression method and use signal detection theory for the study period 2008 to 2018. Misinformation corrections significantly influence the buy- and sell-side trading of qualified foreign institutional investors (Qfii), investment trust companies (Trust), and dealers across quantiles. Misinformation corrections with identified sources have a significant negative influence on institutional investors' decision making across quantiles, whereas those without identified sources show mixed influences. Brief and long-length written clarifications have a significant positive influence on misinformation correction for decision making across quantiles, while those of mid-length have a contrary effect at low and mid quantiles. Misinformation correction in newspapers has a significant negative influence on decision making, but financial newspapers and other sources show the contrary. Multi-purpose newspapers negatively and significantly influence misinformation correction, whereas economic newspapers display insignificant influences. Investment and retained-earnings related clarifications, negatively and positively, significantly influence misinformation correction for decision making, respectively. While technology-related industries indicate positive information signaling and learning from other sources and retained-earnings related clarifications, their counterparts show the opposite from financial newspapers and investment related clarifications. This study identifies the influence of misinformation correction by relating source monitoring and textual analysis. Information signaling has a more significant influence than information learning for the overall market, whereas the contrary is observed for industry segmentations. This study sheds light on misinformation correction strategies and methods. This study sheds light on misinformation correction strategies and methods.

Heterogeneous institutional preferences and informativeness: Evidence from China

Using complete semi-annual stock holdings of seven different types of institutional investors including public mutual funds, insurance companies, social security funds, qualified foreign institutional investors (QFIIs), asset management portfolio of securities companies, proprietary trading portfolio of securities companies, and trust funds, we investigate those heterogeneous institutional investors' preferences and informativeness in the China's A-shares market from 2005 to 2017. We find that although those institutional investors in aggregate prefer to hold stocks with a lower market risk, a larger size, a higher share price, a lower turnover ratio, a higher return on equity ratio, a higher leverage ratio, a higher floating percentage, better past year performance, and lower controlling shareholder's ownership, insurance companies tend to hold past loser stocks. In addition, our results indicate that only qualified foreign institutional investors are informed among those seven types of institutional investors. While our findings show that holding changes of public mutual funds and social security funds exhibit short-term return predictability, there is a price reversal effect for their holdings after one year. Furthermore, qualified foreign institutional investors exhibit a better trading skill while insurance companies demonstrate a worse trading skill. Finally, our results show that institutional investors are generally market stabilizers in the China's A-shares market.

The investment behavior of Qualified Foreign Institutional Investors in China

Using data from Chinese listed firms, this paper examines the investment behavior of Qualified Foreign Institutional Investors (QFIIs). QFIIs have a preference for large well-known firms with some element of state ownership, lower liability levels and greater turnover capacity. Furthermore, the presence of QFIIs in Chinese firms is associated with better levels of corporate operating performance. We show that this positive relationship is more pronounced, the greater the international investors level of commitment, in terms of investment size and horizon. Our results highlight the heterogeneity of foreign institutional investors and support the view that foreign institutional investors in emerging markets provide an important source of managerial oversight. Our results are particularly noteworthy given all QFIIs in China represent small overall holdings, with shareholdings below blockholder thresholds.

The Influence of Foreign Institutional Ownership on the Stock Liquidity in China Based on Data Analysis

The negative impact of foreign participation on the liquidity of companies that allow a high degree of foreign institutional ownership has been widely documented. This article provides a unique environment for the limited participation of qualified foreign institutional investors (QFIIs) in China’s A-share market, and examines how these factors affect stock liquidity in emerging markets. Contrary to previous findings, the participation of foreign investors has helped increase the liquidity of affected stocks by facilitating increased trading activity. Improved liquidity in small businesses is more important than large ones. The findings of this article are the endogenous robustness and the impact on the stock market, industry impact, and possible impact on the stock exchange. In addition, when analyzing sub-samples of QFII companies, QFII’s liquidity improvement effect is even stronger. This article aims to through data analysis on the stock liquidity provide Chinese stock market with management suggestions.

Rookie Directors and Corporate Fraud

This study examines how rookie independent directors (RIDs) affect corporate fraud. Using a large sample of Chinese listed firms, we find that firms with greater RID representation are more likely to commit fraud. Our result remains robust after controlling for numerous firm and board characteristics, director fixed effects, using alternative measurement, and employing an instrumental variable approach and an entropy balancing matching method. Moreover, the effect of RID representation on fraud is more pronounced for firms with non-Big Four auditors, less qualified foreign institutional investors and institutional ownership, more diversified businesses, related party transactions and intangible assets, and a higher than a critical mass of RIDs. Additional analysis finds that higher board meeting attendance of RIDs is not associated with lower fraud likelihood, strings of consecutive earnings increases mediate the positive relationship between RID representation and fraud, and firms with a rookie board have heightened fraud severity. Overall, our findings highlight that the monitoring efficiency of RIDs in countering fraud could be compromised by their lack of boardroom experience.

Institutional investors, controlling shareholders and CEO pay‐performance relationship: evidence from China

AbstractUsing a large sample of China’s listed firms between 2005 and 2015, we find that domestic mutual funds have a positive effect on the CEO pay‐performance relationship, and this effect becomes stronger when their ownership is higher and closer to the controlling shareholder’s ownership. This effect is stronger in non‐state‐owned enterprises (non‐SOEs), firms facing weaker industry competition incentives, and firms located in more developed regions. However, Qualified Foreign Institutional Investors (QFIIs) do not have such an influence. Overall, our study contends that the effectiveness of institutional investors’ monitoring role is subject to their identity, controlling shareholders and institutional environments.

Political incentives in firms’ financial reporting: evidence from the crackdown on corrupt municipal officials

This paper examines political incentives in firms’ financial reporting during the anti-corruption campaign in China. We find robust evidence that the turnover of municipal officials due to the prosecution of corruption causes affiliated firms to strategically withhold good news relative to bad news. This effect is more pronounced among state-owned firms and firms located in highly corrupt places, while it is depressed among firms with the big-four auditing firms and among firms with Qualified Foreign Institutional Investors. Further tests show that this effect is temporary. We find affiliated firms release minor bad news on time and withhold minor good news during the turnover of corrupt municipal officials. Overall, our study provides novel evidence that firms have political incentives in financial reporting regarding the release of good and bad news, and the anti-corruption campaign in China can act as a governance mechanism to temporarily improve the financial reporting environment.

Which foreign states support the global use of the Chinese renminbi? The international political economy of currency internationalisation

AbstractThe internationalisation of the Chinese renminbi has taken a path distinct from most cases involving previous international currencies, in that policy measures adopted by governments have played crucial roles in it. This paper conducts a cross‐country analysis of the factors that have led foreign governments to introduce three primary policy infrastructures to support renminbi use—renminbi swap lines, Renminbi Qualified Foreign Institutional Investor quotas and renminbi clearing banks. Our analysis shows that a state holding renminbi assets among its reserves or having more developed financial markets is likely to establish a higher level of policy infrastructure supporting renminbi use. We also find that a country's economic and political relations with China may have meaningful impacts on the level of its establishment of those renminbi‐related policy infrastructures. These findings significantly expand our understanding of renminbi internationalisation, by identifying which non‐Chinese factors have affected its progress to date. They also contribute meaningfully to the literature on currency internationalisation and international currencies in general, by calling attention to the roles of foreign states in the process of a currency's internationalisation.

Institutional stock ownership and firm innovation: Evidence from China

This paper investigates different institutions’ ability to influence firm innovation in the largest emerging market, China. We show that mutual funds’ holdings significantly increase firm innovation, but grey institutional holdings (including insurance companies and pension funds) and Qualified Foreign Institutional Investor (QFII) holdings have less or no significant impact on innovations. We suggest this is due to the high equity holdings and less business connections of mutual funds on (with) portfolio firms in comparison with other institutional investors. Our results are robust after applying different measures of firm innovation and controlling for possible endogeneity. This study sheds new light on the effect of different institutional ownerships on firm innovation in emerging economies. Our results provide further evidence that in comparison with more developed markets, institutional investors in emerging markets can govern invested firms through “threat of exit” even when holding a small proportion of shares in the firms.

How foreign investors influence stock markets? The Saudi Arabian experience

ABSTRACTThis paper investigates the impact of foreign institutional investors on valuation, liquidity and volatility in the Saudi stock exchange for the post-liberalization period. Saudi regulators allowed the foreign investment community to invest in the Tadawul All Share Index (TASI) in June 2015. Firstly, the paper finds a positive change in abnormal returns in the three-year post-liberalization period compared to the three-year non-liberalization period (pre-period), suggesting that the entry of qualified foreign institutional investors (QFIIs) benefited security valuation. Further, the higher valuation result is consistent with the prediction of standard international asset pricing models, that stock market liberalization may reduce the liberalizing country’s cost of equity capital by allowing for risk sharing between domestic and foreign agents. Secondly, contrary to the regulators/policymakers’ intention and empirical evidence, the liquidity proxies document mixed evidence. Lastly, this study finds mixed evidence in the price volatility measures. However, the volatility and liquidity finding suggests that the presence of foreign institutional investors is not the source of excess volatility or high turnover on local bourses. Overall, the evidence, on average, shows some signs of improvement for different market efficiency measures during the post-liberalization period compared to the pre-liberalization period. The less than expected improvement in Tadawul during the post-period implies that the Saudi financial regulator’s incentive of opening the TASI for QFIIs coincides with economic vulnerabilities for the Kingdom, stringent QFIIs regulation and weak investor protection laws.