Qualified Foreign Institutional Investors Research Articles

台灣散戶投資人與機構法人處分效果之研究：考量資訊揭露、股票風險與投資人情緒之實證結果

The disposition effect, the tendency of investors to sell winning investments too soon and hold losing investments too long, which explores the irrational behavior of investors, is one of the important issues in behavioral finance. We employ the disposition coefficient approach proposed by Weber and Camerer (1998) to test the disposition effect of all kinds of investors in Taiwan stock market. In addition, we also study the potential effect of information disclosure、stock risk and investor sentiment on the disposition effect. The empirical results show that the disposition effect of individual investors is the strongest. Dealers are in the next place. The disposition effect of securities investment trust companies is relatively weak. Qualified Foreign Institutional Investors（QFII） exhibit no disposition effect. Moreover, individual investors and dealers show the disposition effect, no matter what degree of company's information disclosed. But when dealers invest in highly information disclosing company, the disposition effect is weaker. Securities investment trust companies show the disposition effect when they invest in low information disclosing company, however, when they invest in highly information disclosing company, the disposition effect become insignificant. QFII exhibit no disposition effect, no matter what degree of company's information disclosed. Individual investors and dealers show the disposition effect when they invest in high risk or low risk stock. In addition, we also find that the volatility of past stock return doesn't influence the disposition effect of individual investors、dealers and securities investment trust companies. Finally, investors show the disposition effect no matter what sentiment they have. When investors are optimistic, they show weaker winning disposition effect and stronger losing disposition effect.

Herding and the role of foreign institutions in emerging equity markets

This study examines herding surrounding qualified foreign institutional investors (QFIIs) in an emerging equity market. Using five years of weekly order flow data, I find that, when QFIIs increase (decrease) their weightings in particular sectors, dealers', margin traders', and mutual funds' holdings/weightings likewise increase (decrease) during the same and following weeks, despite controls for return and trading momentum. This herding is potentially destabilizing as prices overshoot and mean revert highlighting the potential negative impact of this level of transparency and of the policy of disclosing QFII trading in emerging markets.

An Analysis of Investment Characteristics of QFIIs in the Chinese Security Markets

We analyzed investment characteristics of qualified foreign institutional investors(QFIIs) through finding what kind of firms is preferred to foreign investors in Chinese security markets. For the purpose of this study, we used a panel of foreign equity holdings of QFIIs from 2004 to 2008. The results from time series cross-sectional regression showed the variables of ROA, firm size and P/E ratio were significant at the significance level of 10%. That is, The variables of ROA and firm size were significantly positive and P/E ratio was negative. Therefore, we found strong evidences that qualified foreign institutional investors focused on the leverage, company size, profitability, and P/E ratios in China This results were also confirmed by the logistics regression.

Has the QFII Scheme Strengthened Corporate Governance in China?

Introduction Corporate governance in China has had a difficult journey since economy opened up in late 70s and made gradual transition from a centrally planned economy to a market economy. In 90s, establishment of Shanghai and Shenzhen stock exchanges and promulgation of Companies Law, corporate governance came into vogue. Then, following Asian Financial Crisis in 1997/98, corporate governance assumed greater importance. The China Securities Regulatory Commission (CSRC) is main regulatory body for listed entities and it was set up in 1992. Over last 17 years, it has attempted to institute good corporate governance including transparency, information disclosure, protection of minority shareholders' interests and rules for appointment of independent directors. In an attempt to improve corporate governance in China's listed companies, CSRC established Qualified Foreign Institutional Investor (QFII) scheme reasoning presence of institutional investors on register of shareholders would help improve corporate governance in Chinese companies they invest in. This article seeks to answer whether QFII scheme has in fact strengthened corporate governance in Chinese listed entities. The Qualified Foreign Institutional Investor (QFII) Scheme The QFII scheme was conceived by CSRC and modelled after QFII scheme adopted by Taiwan in 1991.1 Improved corporate governance was a major objective. According to Ferguson and McGuinness, the QFII scheme carries tremendous potential as a vehicle for raising corporate governance standards. (2) Steven Yeo states with advent of institutional investors in PRC market, their more robust due diligence and investment disciplines, it is anticipated QFII Measures will further encourage greater transparency and improve compliance and corporate governance process of A share companies.... (3) Fred Hu opines the participation of global investors in China's domestic securities market has introduced professional funds management expertise and provided a new advocate for improving corporate governance.... (4) This view was further echoed by Richard Ward, Chairman of UBS Warburg who remarked on 26 November 2002 that QFII will be an important stimulus for improving corporate governance in China because increasingly Mainland companies will be benchmarked against their international peers. (5) It was hope of CSRC QFII scheme would contribute to better corporate governance. The Director General of CSRC stated at a seminar in Hong Kong on 8 November 2002 promulgation of QFII scheme, foreign institutional investors would be able to play a positive role in improving corporate governance in China. It was presumed by CSRC QFII participants, all of whom would be from countries well regulated financial systems, would require sound corporate governance in their target companies to justify their long term investment horizons. This article seeks to ascertain what areas of corporate governance were impacted after some five years of operations. Specifically, how did QFIIs impact shareholders, management, board of directors and market discipline? The QFII Scheme--Rules and Regulations The legal basis for QFII scheme is laid out in Provisional Measure on Domestic Securities Investments by Qualified Foreign Institutional Investors--Decree No. 12 of 5 November 2002. The objectives as stated in Article 1 are twofold: (6) (i) To govern Qualified Foreign Institutional Investors' investments in China's securities market (7) and (ii) To promote development of China's securities market (8) What can QFII invest in? Article 18 of Measure states QFII can invest in following RMB financial instruments: (i) Shares listed in China's stock exchanges (excluding B shares) (ii) Treasuries listed in China's stock exchanges (iii) Convertible bonds and enterprise bonds listed in China's stock exchanges and (iv) Other financial instruments as approved by CSRC Conditions of Scheme The rules are very clear. …

Has the QFII Scheme Strengthened Corporate Governance in China?

Has the QFII Scheme Strengthened Corporate Governance in China? Michael N.T. Tan (bio) Introduction Corporate governance in China has had a difficult journey since the economy opened up in the late 70s and made the gradual transition from a centrally planned economy to a market economy. In the 90s, with the establishment of the Shanghai and the Shenzhen stock exchanges and the promulgation of the Companies Law, corporate governance came into vogue. Then, following the Asian Financial Crisis in 1997/98, corporate governance assumed greater importance. The China Securities Regulatory Commission (CSRC) is the main regulatory body for listed entities and it was set up in 1992. Over the last 17 years, it has attempted to institute good corporate governance including transparency, information disclosure, protection of minority shareholders' interests and rules for the appointment of independent directors. In an attempt to improve corporate governance in China's listed companies, the CSRC established the Qualified Foreign Institutional Investor (QFII) scheme reasoning that the presence of foreign institutional investors on the register of shareholders would help improve corporate governance in the Chinese companies they invest in. This article seeks to answer whether the QFII scheme has in fact strengthened corporate governance in the Chinese listed entities. The Qualified Foreign Institutional Investor (QFII) Scheme The QFII scheme was conceived by the CSRC and modelled after the QFII scheme adopted by Taiwan in 1991.1 Improved corporate governance was a [End Page 353] major objective. According to Ferguson and McGuinness, "the QFII scheme carries tremendous potential as a vehicle for raising corporate governance standards".2 Steven Yeo states that "with the advent of foreign institutional investors in the PRC market, with their more robust due diligence and investment disciplines, it is anticipated that the QFII Provisional Measures will further encourage greater transparency and improve the compliance and corporate governance process of A share companies …."3 Fred Hu opines that "the participation of global investors in China's domestic securities market has introduced professional funds management expertise and provided a new advocate for improving corporate governance ….4 This view was further echoed by Richard Ward, Chairman of UBS Warburg who remarked on 26 November 2002 "that QFII will be an important stimulus for improving corporate governance in China because increasingly Mainland companies will be benchmarked against their international peers".5 It was the hope of the CSRC that the QFII scheme would contribute to better corporate governance. The Director General of the CSRC stated at a seminar in Hong Kong on 8 November 2002 that with the promulgation of the QFII scheme, "foreign institutional investors would be able to play a positive role in improving corporate governance in China". It was presumed by the CSRC that the QFII participants, all of whom would be from countries with well regulated financial systems, would require sound corporate governance in their target companies to justify their long term investment horizons. This article seeks to ascertain what areas of corporate governance were impacted after some five years of operations. Specifically, how did QFIIs impact shareholders, management, board of directors and market discipline? [End Page 354] The QFII Scheme — Rules and Regulations The legal basis for the QFII scheme is laid out in the "Provisional Measure on Domestic Securities Investments by Qualified Foreign Institutional Investors — Decree No. 12 of 5 November 2002. The objectives as stated in Article 1 are twofold:6 (i). To govern Qualified Foreign Institutional Investors' investments in China's securities market7 and (ii). To promote development of China's securities market8 What can QFII invest in? Article 18 of the Provisional Measure states that the QFII can invest in the following RMB financial instruments: (i). Shares listed in China's stock exchanges (excluding B shares) (ii). Treasuries listed in China's stock exchanges (iii). Convertible bonds and enterprise bonds listed in China's stock exchanges and (iv). Other financial instruments as approved by CSRC Conditions of the Scheme The rules are very clear. Only the very large foreign financial institutions need apply for fund managers, they must have assets in excess of US$10 billion during the most recent accounting year and have operated for over five years. Insurance companies must have assets...

Local Effects of Foreign Ownership in an Emerging Financial Market: Evidence from Qualified Foreign Institutional Investors in Taiwan

We examine the local effects of equity ownership by investors who are classified as qualified foreign institutional investors in Taiwan. Our empirical analyses reveal a pronounced foreign ownership effect, whereby stocks with high foreign ownership outperform stocks with low foreign ownership. The valuation effect is present even after controlling for firm export, size, or transparency levels. We pursue a performance‐based explanation for this effect and find that foreign ownership is strongly and positively associated with firm R&D expenditures and contemporaneous and subsequent firm performance. Our evidence is consistent with foreign investors who enjoy a long‐run information advantage over domestic investors.

Impact of the QFII Scheme on Investment‐Cash Flow Sensitivity*

AbstractTaiwan is an important emerging economy which has adopted a progressive strategy to open up its securities markets, mainly through the QFII (Qualified Foreign Institutional Investor) scheme. This paper examines Taiwan's QFII experience so as to determine whether the implementation of such a policy has helped reduce corporate investment‐cash flow sensitivity. Empirical results suggest that the launching of the QFII program as an interim institutionalization strategy to attract foreign capital into Taiwan's securities markets has been successful in relaxing corporations' investment‐cash flow sensitivity.

Information Contents of QFIIs' Cascades in the Taiwan Stock Market

This study follows and extends Sias (2004) to examine whether Qualified Foreign Institutional Investors' (QFIIs') herding behavior exists in the Taiwan stock market. By testing the cross-sectional dependence in QFII's demand over two adjacent months and decomposing them into QFIIs' own cascades and other cascades, we demonstrate that QFIIs' herding still exists even if QFIIs' cascades mainly result from their own trades of securities with at least medium trading frequency, regardless of the raw fraction of numbers or shares on QFIIs buying. We find little evidence that QFIIs' herding is driven by habit investing in stocks which QFIIs trade with at least low-to-medium frequency. Momentum trading of QFIIs accounts for little of their herding behavior, and the obviously positive relation between QFIIs' demand and their lag demand changes little even with their momentum trading taken into consideration. Most importantly, QFIIs are more likely to herd in smaller capitalization securities; thus, informational cascades rather than investigative herding are the main reason for QFIIs' herding in the Taiwan stock market.

The Influence of Qualified Foreign Institutional Investors on the Association between Default Risk and Audit Opinions: Evidence from the Chinese Stock Market

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: Numerous studies demonstrate that audit opinions provide strong signals to investors/debt holders warning of firms’ default probability. When foreign investors were allowed to enter the Chinese stock market, the role of audit opinions grew in importance. In this study, we examine the relationships between audit opinions and default probability within the Chinese stock market, and explore whether there was any significant shift in this relationship following the entry of Qualified Foreign Institutional Investors (QFIIs).Research Findings/Insights: We find that audit opinions began providing signals of potential default risk only after QFIIs entered the market; suggesting that in the post‐December 2002 period, auditors’ decisions in China became more conservative, and that institutional investors began to play a monitoring role.Theoretical/Academic Implications: This study provides support for institutional theory through the provision of empirical evidence showing that audit opinions, as signals of potential default risk, may actually be less efficient in immature markets than in more mature markets. Furthermore, the role of audit opinions in providing such signals to outside investors can clearly be affected by the introduction of new monitoring mechanisms. The results imply that market maturity could prompt firms to provide more accurate information.Practitioner/Policy Implications: The strengthening of security laws could increase confidence among investors in China, thereby providing evidence to market participants showing that the more accurate information and greater efficiency of audit opinions, arising as a direct result of the entry of QFIIs, could lead to expansion of the Chinese investment environment.

Structural changes in foreign investors’ trading behavior and the corresponding impact on Taiwan's stock market

This study investigates the impact of the expected and unexpected trading behavior of foreign investors on return volatilities during structural change periods. And the jump intensity model pinpoints crucial events that have influenced the stock market. The empirical results find that there has been a stabilizing effect of foreign investment on Taiwan's stock market as restrictions on foreign trading have been gradually relaxed, as opposed to there being a complete relaxation of the restrictions imposed on Qualified Foreign Institutional Investors (QFIIs).

From Non-Tradable to Tradable Shares: Split Share Structure Reform of China's Listed Companies

Prior to China's split share structure reform, domestic A shares were divided into tradable and non-tradable shares. There were two main reasons for the existence of non-tradable shares. First, the main aim of setting up the stock market was to enable state-owned enterprises to raise capital. Secondly, the government wanted to retain control of these enterprises. The existence of non-tradable shares has been regarded as the biggest impediment to the development of China's equity market and has caused the government a headache for many years. There was a previous attempt in 2001 to release these non-tradable shares onto the market but it ended in failure as the stock market reacted negatively to the prospect of a huge increase in the supply of shares. The government has learnt some lessons from its past failure. The government had prepared the ground for support of the market through its Qualified Foreign Institutional Investor Scheme and Administrative Measure for Strategic Investment in Listed Companies by Foreign Investors. Under the reform, non-tradable shareholders negotiated a compensation plan with tradable shareholders in order to make their shares tradable. Protection of the interests of tradable shareholders was essential to shore up investor confidence. While the reform appears to have been carried out successfully, it raises several issues of concern: first, the extent to which individual retail investors are truly protected by giving them a say on whether the compensation package is accepted and implemented; secondly, the absence of a legal basis to justify discriminating against B shareholders by denying them the right to vote on the compensation package and to receive compensation from non-tradable shareholders; and third, without a sound theoretical basis for explaining state enterprise property rights, conversion of non-tradable shares to tradable shares will not help to resolve past ambiguity over ownership of state assets under the control of these companies.

ARE CHINESE STOCK MARKETS INCREASING INTEGRATION WITH OTHER MARKETS IN THE GREATER CHINA REGION AND OTHER MAJOR MARKETS?

This paper investigates the cointegrating and long‐term causal relationships between the Shanghai A and B‐share market, and between these two markets and the Hong Kong, the Taiwanese, the Japanese and the US market of two sub periods between July 1993 and March 2007. On the basis of a new Granger non‐causality test procedure developed by Toda‐Yamamoto (1995) and Johansen's (1988) cointegration test, my results suggest that a long‐term equilibrium relationship measured by cointegration has been merged between the Chinese A‐share market and the other markets in greater China region as well as the US market during the post‐crisis period which covers the period since Chinese A‐share market was opened to the Qualified Foreign Institutional Investors (QFII) in 2002. I also found that the Shanghai A‐share market uni‐directionally Granger‐causes the other regional markets after the Asian financial crisis, while the A‐share market and Hong Kong H‐share market have had a significant feedback relationship since then. However, I found no evidence there has been cointegrating relationship between Shanghai B‐share market and any other market ever since the B‐share market was opened to the local retail investors in 2001.

Equity Valuation in Mainland China and Hong Kong: The Chinese A-H Share Premium

This paper studies the links between fundamental value and market price of the companies listed in both mainland A-share and Hong Kong H-share markets. As the valuation model has been inadequately applied in the literature, this study theoretically clarifies that the dividends discount model (DDM) and it derivatives are suitable for firms, but not for general consumers and investors, to evaluate equity fundamental values. Thus, using DDM and its derivatives to determine the market price of equity, which has been done in many other studies, is problematic. This paper also empirically studies how accounting data determines fundamental values of equities using a pooled-data vector autoregressive method. It indicates that although fundamental value can be a benchmark for investors to price equity, prices of equity may deviate from fundamental values substantially for a long time due to differences in preference and the extent of risk aversion between A-shares and H-shares. Correlation between equity price and its fundamental value for H-shares is larger than the correlation for A-shares. This paper also explains why there has been a big price gaps between A-shares and H-shares with exactly the same yields rights. The estimates of fundamental value for each company help investors make rational investment decisions. It suggests that, in the long run, healthy development of Chinese securities markets will depend on the progress of privatisation and marketisation of the Chinese economy. Measures such as the Qualified Foreign Institutional Investors (QFII) and Qualified Domestic Institutional Investors (QDII) programmes should be adopted to improve the efficiency of financial resources utilisation in mainland China, despite the short-run pressure that may put on A-share markets.

Foreign Ownership Restrictions, Depositary Receipt Supply, and Investor Sentiment on Taiwanese Depositary Receipt Premiums

This paper focuses on the price difference between depositary receipts (DRs) and the underlying securities issued by Taiwanese firms under foreign ownership restrictions. We examine two issues: (1) the price relationships between DRs and their underlying securities, and (2) the determinants of the price differences between DRs and their underlying securities. The empirical results show that large daily price differences are observed between DRs and their underlying Taiwanese securities. However, these price differences do not exist for DRs traded in different free-entry countries. We examine the determinants of the price differences between DRs and their underlying securities, and find that the time-series qualified foreign institutional investor (QFII) surplus, defined as the QFII ownership limit ratio minus the actual QFII ownership ratio, is inversely associated with the DR premium. As the foreign ownership restrictions become tighter, the QFII surplus decreases and the DR premium increases. The results also indicate that a structural change in the relationships between DR premiums and investor sentiment variables occurred in 1997. The DR premiums are sensitive to non-QFII holdings, defined as the total foreign holdings minus the QFII holdings, before 1997. However, post 1997 the DR premiums become more sensitive to firm size, but less sensitive to non-QFII holdings post 1997. The change in demand caused by regulation and investor sentiment is reflected in DR prices, which leads to the variations in DR premiums. Furthermore, this study finds a supply-side effect on DR premiums. As firms increase DRs issues, the DR premiums become smaller. This study concludes that regulation, investor sentiment (both can be viewed as demand for DRs), and supply conditions explain the DR premiums.

The Impact of Introduction of QFIIs Trading on the Lead and Volatility Behavior: Evidence for Taiwan Index Futures Market

This paper investigates whether the introduction of trading by qualified foreign institutional investors (QFIIs) has impacted the lead and volatility behavior of the futures market when the macroeconomic effects and some major economic events are controlled. First, we detect that some market inefficiency exists in Taiwan index futures market. Second, the evidence shows a strengthening in the lead of index futures over index spot markets following the introduction of trading by QFIIs. Third, we find evidence of an increase in the level of futures market volatility, implying that the quantity of information flowing into the futures market increases following the onset of trading by QFIIs. Finally, the asymmetries do not reduce after the opening up of the futures market to QFIIs. This finding is inconsistent with the view that the introduction of informed foreign investors may improve the reliability and quality of information and mitigate the effect of noise traders on market volatility.

The Effect of Foreign Ownership Restrictions on the Price Dynamics of Depositary Receipts—Evidence from the Taiwan and Hong Kong Markets

In this paper, we study depositary receipt prices in regulated markets and free-entry markets. Because of their unique environments, the Taiwanese and Hong Kong markets provide interesting settings that have not yet been explored in the literature. In particular, we focus on the following: (1) the difference in the long-term price relationships between depositary receipts and underlying securities in free-entry and regulated areas, (2) the price dynamics of the depositary receipts for firms with and without the long-term equilibrium relationships between depositary receipts and underlying securities, and (3) the incremental information content of the qualified foreign institutional investor (QFII) ownership ratio for the depositary receipts issued by Taiwanese firms. The empirical results reveal that long-term equilibrium relationships between depositary receipts and underlying security prices exist for firms listed in Hong Kong, a free-entry market, but do not necessarily exist for firms listed in Taiwan with foreign ownership restrictions. The long-term equilibrium relationships between depositary receipts and underlying securities and the local market conditions are the most important factors in explaining the depositary receipt returns when the equilibrium exists. In the absence of equilibrium, the lagged returns of depositary receipts or underlying securities and the local market conditions become important. In addition, QFII ownership ratios significantly explain the depositary receipt price variations in a regulated market, which implies the restriction effect on the price dynamics of the depositary receipts.

Milestone or Millstone?

This article addresses the following key points: With its Qualified Foreign Institutional Investors (QFII) scheme, China has taken a first step in opening capital markets. Cautious institutional investors gravitate toward large-cap A-shares and bonds. US-based Securities Industry Association (SIA) views QFII restrictions as onerous and urges reform. The projected impact of QFII on China includes improved corporate governance plus the introduction of fundamental analysis and long-term investing.

Stock Market Liberalization and Market Returns in China: Evidence from QFII Announcement

Stock market liberalization is a decision to allow foreign investors to purchase domestic shares. This paper is an event study on market reactions around the announcement of the Qualified Foreign Institutional Investors (QFII) scheme in China. We find no significant abnormal returns in market indices in the short-term period leading up to the announcement, negative abnormal returns in the short-term period following the announcement, and no significant abnormal returns in the long-term period thereafter. The findings do not comply with the prediction of international asset pricing models. The QFII scheme may not help much in reducing the cost of equity capital and risk premium of China companies.

The Impacts of Foreign Capital and Price Discovery Process between Taiwan and Singapore Futures Contracts

This paper investigates the cross-market linkage between Singapore and Taiwan futures markets for the pre- and post-participation of qualified foreign institutional investors (QFIIs) in Taiwan futures' trading. We employ error correction model and generalized impulse response function to gauge the causal transmission patterns between the two markets. The two markets cointegrated after the participation of QFIIs in Taiwanese market, suggesting that QFIIs play an important role between the two markets. We also find that Singapore futures market performs the price discovery of Taiwan stock index futures.

The PRC Qualified Foreign Institutional Investors Market

The PRC Qualified Foreign Institutional Investors Market