Information asymmetry, policy shocks, and international equity investment: Evidence from the anti‐corruption campaign in China

Information plays a critical role in financial transactions and markets, especially in international investment where foreign investors are at an informational disadvantage relative to domestic investors. Prior studies show a positive reaction of the Chinese capital market to China's anti‐corruption campaign, which is also consistent with improved performance of Chinese listed firms following the campaign. We document a contrasting reaction of less‐informed foreign investors. Exploiting staggered anti‐corruption investigations across provinces as plausibly exogenous shocks, we find that foreign institutional investors increase their equity investments in Chinese listed firms headquartered in affected provinces following the anti‐corruption campaign; foreign individual investors, by contrast, reduce their equity investments after the campaign, which is driven by those with non‐Chinese ethnicity. Further analyses show that the increased equity investments of foreign investors stem primarily from those residing in jurisdictions sharing a similar cultural tradition with China. Our study has significant implications for foreign investors in the context of the increasingly intense relationship between China and the West.