Do Foreign Institutional Investors Improve Price Efficiency?

Does governance travel around the world? Evidence from institutional investors

Marcin Kacperczyk, Savitar Sundaresan, Tianyu Wang and Wei Jiang

The Review of Financial Studies, 2021, vol. 34, issue 3, 1317-1367

Abstract: We study the impact of foreign institutional investors on price efficiency with firm-level international data. Using additions to the MSCI index and the U.S. Jobs and Growth Tax Relief Reconciliation Act as exogenous shocks to foreign ownership, we show that greater foreign ownership increases stock price informativeness, especially in developed economies. This increase arises from new information that foreign investors bring in and displacement of less-informed domestic retail investors. Finally, we show that foreign ownership, particularly from active investors, increases market liquidity, reduces firms’ cost of equity, and increases firms’ real investment growth.

JEL-codes: G11 G12 G14 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (49)

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