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Foreign Institutional Investors and Stock Market Liquidity in China: State Ownership, Trading Activity and Information Asymmetry

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  • Ding, Mingfa

    ()
    (Department of Economics, Lund University)

  • Nilsson, Birger

    ()
    (Department of Economics, Lund University)

  • Suardi, Sandy

    ()
    (La Trobe University)

Abstract

The Chinese government implemented the Qualified Foreign Institutional Investor (QFII) system in order to advance the quality of local capital markets by participation of foreign institutional investors. This paper identifies 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, 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.

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Bibliographic Info

Paper provided by Lund University, Department of Economics in its series Working Papers with number 2013:10.

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Length: 37 pages
Date of creation: 23 Apr 2013
Date of revision: 11 Jun 2013
Handle: RePEc:hhs:lunewp:2013_010

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en
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Keywords: liquidity; emerging markets; foreign institutional investors; real frictions; informational frictions;

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