Foreign versus domestic institutional ownership and stock price synchronicity in Taiwan

Pi-Yun Yang (), Dun-Yao Ke (), Kai-Chien Chen () and Thi Bao Ngoc Nguyen ()
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Pi-Yun Yang: National Kaohsiung University of Science and Technology (First Campus)
Dun-Yao Ke: National Sun Yat-Sen University
Kai-Chien Chen: National Cheng Kung University
Thi Bao Ngoc Nguyen: Nha Trang University

Financial Markets and Portfolio Management, 2024, vol. 38, issue 2, No 4, 239-263

Abstract: Abstract There is limited research on the impact of foreign versus domestic institutional ownership on stock price synchronicity. Drawing upon the agency-linked external monitoring theory, this study examines a dataset of Taiwanese firms from 2004 to 2020. The findings demonstrate that foreign institutional ownership exerts a more negative influence on stock price synchronicity than domestic institutional ownership, especially in firms with high level of agency problems. These results support the hypothesis that foreign institutional investors effectively capture firm-specific information flows through external monitoring and hence reduce the synchronicity of stock prices. Furthermore, our additional findings suggest that foreign institutional ownership’s greater negative impact on synchronicity is more pronounced in firms with Big 4 auditors, extensive analyst coverage, and high media attention. This implies that foreign institutional entities serve as supplementary supervisory mechanisms in conjunction with other external monitors, contributing to mitigating stock price synchronicity. Consequently, our study resolves the ongoing debate regarding whether foreign or domestic institutional investors play a more significant role in gathering and processing firm-specific information.

Keywords: Stock price synchronicity; Foreign institutional ownership; Domestic institutional ownership; External monitoring (search for similar items in EconPapers)
JEL-codes: G12 G23 G34 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11408-023-00441-2

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