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Domestic and foreign institutional investors' behavior in China

Author

Listed:
  • Ningyue Liu
  • Don Bredin
  • Liming Wang
  • Zhihong Yi

Abstract

This paper compares the investment characteristics between foreign funds operating under Qualified Foreign Institutional Investors (QFIIs) in China and domestic Chinese funds and analyzes the firm-level drivers that influence their allocation choices. The analysis reveals that foreign funds have a preference for a range of sectors such as transportation, metals and non-metals, and machinery, as opposed to industries with a requirement for local knowledge. The portfolios of domestic Chinese funds are distributed more evenly than those of the foreign funds. The comparative analysis indicates that foreign funds invest in firms that are significantly different from those favored by domestic funds in terms of size, profit, and compensation of management. Finally, we find that when making investment decisions, foreign funds tend to rely on some corporate governance indicators, which is not consistent with the results obtained from previous studies examining developed markets. In particular, foreign funds have a preference for firms with a high percentage of state-owned shares, while the reverse is the case for domestic funds. These empirical findings highlight the differences between QFII and domestic fund investment preferences and will be of value to policy-makers in emerging markets, and China, in particular, in gauging the important drivers of foreign investment.

Suggested Citation

  • Ningyue Liu & Don Bredin & Liming Wang & Zhihong Yi, 2014. "Domestic and foreign institutional investors' behavior in China," The European Journal of Finance, Taylor & Francis Journals, vol. 20(7-9), pages 728-751, September.
  • Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:728-751
    DOI: 10.1080/1351847X.2012.671778
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    Citations

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    Cited by:

    1. Zhang, Yongjie & Cao, Xing & He, Feng & Zhang, Wei, 2017. "Network topology analysis approach on China’s QFII stock investment behavior," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 473(C), pages 77-88.
    2. Zou, Liping & Tang, Tiantian & Li, Xiaoming, 2016. "The stock preferences of domestic versus foreign investors: Evidence from Qualified Foreign Institutional Investors (QFIIs) in China," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 12-28.
    3. McGuinness, Paul B. & Vieito, João Paulo & Wang, Mingzhu, 2017. "The role of board gender and foreign ownership in the CSR performance of Chinese listed firms," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 75-99.
    4. repec:eee:riibaf:v:46:y:2018:i:c:p:30-42 is not listed on IDEAS
    5. Roberto Álvarez & Mauricio Jara-Bertín & Carlos Pombo, 2016. "Do institutional investors unbind firm financial constraints? Evidence from emerging markets," Documentos CEDE 015114, Universidad de los Andes - CEDE.
    6. repec:gam:jjrfmx:v:12:y:2019:i:3:p:114-:d:245085 is not listed on IDEAS
    7. repec:bla:finrev:v:52:y:2017:i:1:p:101-144 is not listed on IDEAS
    8. repec:eee:respol:v:46:y:2017:i:9:p:1533-1551 is not listed on IDEAS
    9. Rong, Zhao & Wu, Xiaokai & Boeing, Philipp, 2017. "The effect of institutional ownership on firm innovation: Evidence from Chinese listed firms," Research Policy, Elsevier, vol. 46(9), pages 1533-1551.
    10. repec:eee:pacfin:v:53:y:2019:i:c:p:236-253 is not listed on IDEAS
    11. repec:gam:jsusta:v:10:y:2018:i:8:p:2769-:d:162085 is not listed on IDEAS
    12. Korkeamäki, Timo & Virk, Nader & Wang, Haizhi & Wang, Peng, 2018. "Learning Chinese? The changing investment behavior of foreign institutions in the Chinese stock market," BOFIT Discussion Papers 19/2018, Bank of Finland, Institute for Economies in Transition.
    13. Han, Liyan & Zheng, Qingqing & Li, Lei & Yin, Libo, 2015. "Do foreign institutional investors stabilize the capital market?," Economics Letters, Elsevier, vol. 136(C), pages 73-75.

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