Foreign ownership and stock liquidity uncertainty

Using manually collected data on foreign investors in China from 33 jurisdictions between 2008 and 2018, we find evidence supporting the view that foreign investors significantly reduce stock liquidity uncertainty. The results of instrumental variable regressions corroborate this causal relationship. Foreign investors introduce good governance practices and socially responsible philosophies to Chinese listed firms, reducing stock liquidity uncertainty. However, we find that a greater cultural distance between foreign investors and investee firms undermines the marginal effect of foreign ownership on reducing stock liquidity uncertainty. Furthermore, the effect of foreign investors on reducing stock liquidity uncertainty is greater for firms with poor corporate governance. Therefore, we conclude that foreign investors play a positive role in the world’s largest emerging stock market.