Knut Wicksell Working Paper Series, Knut Wicksell Centre for Financial Studies, Lund University
Foreign Institutional Investors and Stock Market Liquidity in China: State Ownership, Trading Activity and Information Asymmetry
(), Birger Nilsson
() and Sandy Suardi
Abstract: The Chinese government has implemented the Qualified
Foreign Institutional Investor (QFII) system in order to promote stock
market liquidity by participation of foreign institutional investors. This
paper is the first to explicitly identify the channels through which
foreign institutional investors influence the liquidity on the Chinese
stock markets. Firstly, we find that market participation by foreign
institutional investors promotes liquidity both for state-owned enterprises
(SOEs) and non-SOEs. Secondly, foreign institutions influence liquidity
through the informational frictions channel, but not through the real
frictions channel. Thirdly, as implied by these two results, foreign
institutions are not informationally disadvantaged when investing in SOEs.
Finally, the link between foreign institutional participation and liquidity
remains strong before, during, and after the recent financial crisis.
Keywords: Liquidity; emerging markets; foreign institutional investors; real frictions; informational frictions; (follow links to similar papers)
JEL-Codes: C23; G12; G18; G32; (follow links to similar papers)
36 pages, June 19, 2013
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