Qualified Foreign Institutional Investors Research Articles

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.

The mechanisms of institutional activism: qualified foreign institutional investors in China

Key points: - This article examines the mechanisms available to institutional investors in China, especially Qualified Foreign Institutional Investors (QFIIs), that may allow them to engage in activism in publicly traded corporations. - The presumption behind China’s QFIIs policy is that foreign institutional investors will engage in activism and improve the corporate governance of Chinese listed companies. - The article explores the mechanisms available to QFIIs and identifies the extent to which they have the capacity or potential capacity to engage in shareholder activism. - The article concludes that QFIIs could potentially form shareholder consortia. However, based on Shapley-Shubik and Banzhaf-Coleman indices which measure QFIIs’ voting power, it further concludes that QFIIs do not have the capacity or even the potential capacity to form shareholder consortia with sufficient weight to engage in activism.

Impact of US Uncertainty on Chinese Stock Market Volatility

ABSTRACTThe process of opening the Chinese stock market has sped up in the last two decades. This paper investigates the effects of the uncertainty in the US measured by news-implied volatility on the Chinese stock market volatility. Our empirical results for the full sample period (1997–2016) reveal that there is no clear effect of US uncertainty on fluctuations in China’s stock market. However, based on the subsample analysis along the opening progress in the Chinese stock market, we observe that US uncertainty had a significant effect on Chinese stock market volatility after Qualified Foreign Institutional Investors (QFII) and Renminbi QFII were allowed to invest in the Chinese stock market. The results are the same after the global financial crisis. Our results imply that the US uncertainty should be considered by investors deciding on investment strategy. The government should also consider the US uncertainty when enacting the policy on opening policy the Chinese stock market.

Foreign institutional investors and stock price synchronicity of Chinese listed firms: further evidence

This paper extends a recent study (He et al., J Bus Policy Res 11(2):23–44, 2016) and reexamines the information role of foreign institutional investors in the China A-share market. The benchmark result in this study confirms the findings in He et al. (2016) that there is a positive association between the participation of foreign institutional investors via qualified foreign institutional investors (QFII) scheme and stock price synchronicity in the China A-share market. This implies that foreign institutional investors lose the informative advantage in the China A-share environment. The result is robust when we control for the nonlinearity of ownership concentration, exclude financial firms and firms with negative net income in two most recent fiscal years, correct for self-selection bias, and use alternative measure of stock price informativeness. Further analyses find a negative interaction between dividend payments and QFII participation and between Ernst & Young (EY), Deloitte & Touche, KPMG and PricewaterhouseCoopers (PwC) auditors and QFII participation. The results indicate that dividends and big four auditors are more likely to play the role of assisting QFIIs to improve their information position in the China A-share environment where the legal and regulatory protection of investors is poor.

Do foreign institutional investors enhance firm innovation in China?

ABSTRACTThis paper investigates the impact of the Qualified Foreign Institutional Investor (QFII) scheme regulated by the Chinese government on firm innovation in China. By explicitly addressing the potential endogenous relationship between foreign institutional ownership and firm innovation, we find that foreign institutional investors enhance firm innovation in China, suggesting that the Chinese government should further relax its foreign capital investment control, for example, increase the quota of the QFII scheme.

Heterogeneous Institutional Preferences and Informativeness: Evidence From China

Using complete semi-annual stock holdings of seven different types of institutional investors: mutual funds, insurance companies, qualified foreign institutional investors (QFIIs), social security funds, proprietary trading portfolio of securities companies, asset management 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 growth, larger size, higher share price, lower turnover, lower volatility, higher leverage, and past winner stocks, insurance companies and trust funds like to hold value and past loser stocks, suggesting that insurance companies and trust funds are more conservative than other institutions. In addition, we find that stock holdings of QFIIs and holding changes of mutual funds and social security funds account for the explanatory power of total institutional ownership on stock returns in the following six months, suggesting that mutual funds, QFIIs, and social security funds are more informed than other institutions. Furthermore, our trading portfolio analysis shows that social security funds demonstrate a superior stock picking ability while insurance companies’ trading portfolio exhibits a loss in the following six months. Collectively, because social security funds have a higher than average churn rate and insurance companies exhibit a lower than average churn rate during our sample period, our evidence suggests that more informed institutions also trade more often in the China’s A-shares market.

Private Information, Investor Sentiment, and IPO Pricing: Which Institutional Investors Are Better Informed?

ABSTRACT We provide new empirical evidence that certain institutional investors have private information that they use to profit from initial public offerings (IPOs). In this study, we analyze the bidding information related to five types of institutional investors in China’s ChiNext market to examine the impact of private information and investor sentiment on first-day IPO returns. The results show that private information and institutional investor sentiment are positively correlated with initial returns. The analysis of the different institutional sectors shows that some securities companies may profit from IPOs by using private information. It was also found that qualified foreign institutional investors (QFII) may be at an informational disadvantage on the Chinese stock market.

Sustainable Returns: The Effect of Regional Industrial Development Policy on Institutional Investors’ Behavior in China

Within the market economy system controlled by the Chinese government, this study mainly explores whether government policies can sufficiently guide the investment decisions of professional investors. Thus, we examine whether professional investment institutions can support the government’s policy for long-term investment to produce sustainable returns and create value for both the country and investment institutions. To perform this test, we use the annual data from firms held by institutional investors and listed in China A-shares to run a panel regression model. We then explore the following three issues: first, we examined whether firm-level characteristics or regional industrial development policy affect the investment behavior of the institutional investors. Second, we investigated whether four types of institutions have different favorite economic regions in China under the regional industrial development policy. Third, we analyzed which type of institutional investor supports the regional industrial development policy. The above four types of institutions are: independent, grey, domestic, and qualified foreign institutions. Empirical results show that both firm-level characteristics and regional industrial development policy can affect the investment behavior of the institutional owners. Of all the firm-level characteristics selected by institutions in China, return on equity (ROE) is the condition most commonly selected for all types of institutions, whereas the dividend yield (DY) is considered only by qualified foreign institutional investors (QFIIs). Notably, both independent and domestic institutions have the same firm selection criteria. As for the institutions’ favorite industries for investment, only grey institutions prefer the power industry and QFIIs prefer manufacturing industry. In addition, all four types of institutional investors have different industrial favorites in the four economic regions in China under the regional industrial development policy. For example, independent institutions prefer the information industry and grey institutions appear to be interested in every industry. Moreover, domestic institutions prefer the manufacturing and information industries, whereas QFIIs prefer the manufacturing industry. Regarding the regional participation of institutions, both domestic institutions and QFIIs seem to focus on every region. Moreover, independent institutions focus on the eastern and western regions, whereas grey institutions only focus on the western region. Finally, domestic institutions received the greatest level of support, followed by grey and independent institutions, whereas the QFIIs receive the least support. Put simply, domestic institutions are deeply engaged in industrial development all over China, whereas QFIIs are only slightly engaged in this development.

The Dynamics of Financial Market Integration Between Chinese A- and H-Shares

ABSTRACTThis study examines the dynamics and underlying determinants of integration based on cross-listed Chinese A-shares and Hong Kong H-shares from January 1996 to December 2016. We focus mainly on three liberalization reforms: the qualified foreign institutional investors (QFII) policy, the qualified domestic institutional investors (QDII) policy, and the Shanghai-Hong Kong Stock Connect program. Our results show that the QDII policy has significantly increased the integration between the Mainland China and Hong Kong stock markets, although the extent to which any stock has been affected is partly dependent upon certain firm-specific characteristics, including liquidity, market value, and volatility. However, we do not document the similar effect of the QFII policy and the Shanghai-Hong Kong Stock Connect program on the integration dynamics.

On Foreign Shareholdings and Agency Costs: New Evidence from China

ABSTRACTThis article examines the impact of foreign shareholdings on agency costs of Chinese firms from 2006 to 2012. The empirical results indicate that: (1) direct foreign shareholdings, in contrast to indirect foreign shareholdings, improve asset utilization, suggesting low agency costs; (2) qualified foreign institutional investors play a significant role in firms because they are less subject to political pressure, which is consistent with lower agency costs, but this effect could be eroded by government control; and (3) foreign shareholdings reduce the cost of equity and improve firm performance. The results contribute to the privatization of state-owned enterprises and the domestic/foreign ownership structure of firms.

Tax Issues Relating to Qualified Foreign Institutional Investors: The Chinese Experience

This article considers the issues that have arisen regarding tax administration and collection in respect of qualified foreign institutional investors (QFIIs), including the withholding tax obligations of listed companies, tax information asymmetry and the identification of taxpayer shareholdings. The authors conclude that the system for QFIIs requires further refinement.

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 deeper the international investors commitment, in terms of investment size and horizon. Our results highlight the heterogeneity of foreign institutional investors and provide evidence to support the view that foreign institutional investors in emerging markets provide an important source of managerial oversight. Our results are particularly noteworthy given all QFII’s in China represent small investors, with shareholdings below blockholder thresholds.

The Investment Behavior of Qualified Foreign Institutional Investors in China

The Investment Behavior of Qualified Foreign Institutional Investors in China

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

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.

Foreign investment, corporate governance and performance in the Chinese listed A Share companies

We present a novel lens on the presence and impact of qualified foreign institutional investors (QFII) in top shareholdings of the non-financial domestically listed Chinese ‘A’ share firms. The initial results suggest that the presence of a QFII as a top shareholder in these companies is associated with their better performance, using both Tobin’s Q and ROA as the performance measures. Our models include variables representing corporate governance mechanisms, foreign legal person shares, a proxy for international affiliations and a number of time-variant firm characteristics. Economically, the coefficient of impact on the market measure is the more significant, while the effect of having a QFII in top shareholdings on both performance measures is empirically significant. Previously, studies have often ignored the potential for reverse causality beyond using lagged regressors. This is problematic. Therefore, we follow up with a 2SLS instrumental variables and system GMM model to further mitigate this potential and find the empirical relationship holds. Contrary to earlier work on QFIIs and governance post-implementation of the QFII scheme, the findings from our models suggest that the presence of a QFII top shareholder augments market performance holding equal existing corporate governance mechanisms and other controls.

Relationships between Chinese stock market and its index futures market: Evaluating the impact of QFII scheme

The purpose of this study is to examine the impact of the Qualified Foreign Institutional Investors (QFII) on the dynamic relationship between the Chinese stock index futures and spot markets. The research uses high frequency data (5min interval) and various dynamic methods including VECM, GJR, BEKK and DCC GARCH models to evaluate price discovery and volatility spillover effect. The data used is from 01/02/2011 to 29/07/2011, which includes 3 months before and after the implementation of the QFII scheme to trade in the Chinese stock index futures market. We find a bi-directional asymmetric lead-lag relationship between the Chinese stock index futures and spot markets, indicating a significant lead from the futures market to the spot market but weak lead from the spot market to the futures market in terms of both magnitude and lasting time. It is observed that the introduction of the QFII has enhanced the price discovery role of the futures market and increased the predictive power of the futures market. Our empirical results show that the Chinese stock index futures market has become less volatile (risky) and probably more efficient after the introduction of QFII. We find that foreign institutional investors could enhance the volatility spillover effect from the futures market to the spot market, indicating an improvement in information transmission running from the futures to spot markets. Our results suggest that Chinese government should continue opening its financial markets to the world. The dynamic conditional correlation between the futures and spot markets decreases and becomes more volatile after the introduction of QFII. This indicates that the futures and spot markets become less correlated after the QFII event which may have major influence on hedging strategies.

Does voluntary corporate social performance attract institutional investment? Evidence from China

AbstractManuscript TypeEmpiricalResearch Question/IssueThis study analyses whether institutional investment in China is affected by the voluntary corporate social performance (CSP) of firms, after controlling for ownership structure, corporate governance, compensation, and other firm characteristics.Research Findings/InsightsFirms with superior voluntary CSP attract more institutional investment, which remains robust after controlling for the reverse causality problem. Mutual funds are the main driver of the institutional investment pattern in China and they invest more in firms that achieve better voluntary CSP with respect to employment equality and customer care. Insurance companies and social security funds invest more in firms that take care of their customers. Qualified foreign institutional investors (QFIIs) are the only type of institutional investors tilting their investment in favor of firms doing well at saving energy.Theoretical/Academic ImplicationsOur empirical evidence suggests that different types of institutional investors show preferences toward different aspects of investee firms’ voluntary CSP. We innovatively separate firms’ voluntary CSP into expected components that can be explained by firm characteristics and unexpected components (surprises) that cannot be explained by firm characteristics. Although institutional investors, in general, and mutual funds and QFIIs, in particular, own more shares in firms with more voluntary CSP surprises, only mutual funds trade on them in the subsequent year.Practitioner/Policy ImplicationsForeign institutional investors invest more in firms with better voluntary CSP, especially with respect to energy‐saving and environmental issues, but they do not show a significant preference toward firms with better corporate governance in China. Our paper offers implications for policy makers in transitory and emerging economies with regard to encouraging foreign institutional investors’ equity investment.

Do Foreign Investors Better Seize the Moment of Buying and Selling Stocks? An Empirical Investigation Based on SH-HK Connect Scheme

We empirically investigate the Granger causality between northbound SH-HK Connect and domestic market behavior using a newly proposed sequential multiple-horizon non-causation test strategy. Empirical results illustrate that the northbound SH-HK Connect only cause onshore market change in very few windows, which means that foreign investors do not better seize the moment of buying and selling than domestic investors. Given the low proportion of the Qualified Foreign Institutional Investors (QFII) and the northbound Stock Connect quotas in aggregate free float A-share market cap and much lower turnover velocity than individual A-share investors, domestic investors would remain a dominant marginal price setter in the onshore market until foreign ownership reaches more meaningful levels.

Qualified Foreign Institutional Investor Shareholdings and Corporate Operating Performance

In this article, profitability, asset quality, debt risk, and sales growth are used as measurement indices of corporate operating performance. On the basis of panel data of 630 companies for 2008–2014, which is after the completion of China's split-share structure reform, an entity fixed-effects model is used to study the effect of qualified foreign institutional investor (QFII) shareholdings on the operating performance of Chinese non-financial transnational corporations. The results show that the QFII shareholdings ratio and shareholdings checks and balances degree are significantly positively correlated with return on equity and total assets turnover, but they have no significant correlation with asset liability ratio and sales growth rate. The evidence therefore suggests that the higher the QFII shareholdings ratio is, the higher the enthusiasm is for QFII shares participating in corporate governance, and the better the general corporate operating performance. The findings provide an important reference for Chinese transnational corporations to introduce QFII shares to improve governance structure and corporate operating performance.

Capturing the Chinese A-Shares and H-Shares Price Anomaly

With the recent revisions of the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programs, together with the introduction of the Stock Connect program, the mutual accessibility of the Chinese onshore and offshore equity markets is expected to be enhanced. We examine the characteristics of the A- and H-shares price differentials using the data for dual-listed companies during the 2006–2015 period. We find that the price differential narrows in the latter part of the sample period, which coincides with the enhancement of mutual access of both markets. We propose an A/H-share selection mechanism to identify the share class with the lower price and form an A/H-share class index. We show that the mechanism can deliver improved index characteristics compared with a market-capitalization-weighted China A-shares benchmark. The results are robust to different choices of parameters in terms of buffer zone and rebalancing frequency.