How foreign investors influence stock markets? The Saudi Arabian experience

Saqib Sharif

Middle East Development Journal, 2019, vol. 11, issue 1, 105-123

Abstract: This paper investigates the impact of foreign institutional investors on valuation, liquidity and volatility in the Saudi stock exchange for the post-liberalization period. Saudi regulators allowed the foreign investment community to invest in the Tadawul All Share Index (TASI) in June 2015. Firstly, the paper finds a positive change in abnormal returns in the three-year post-liberalization period compared to the three-year non-liberalization period (pre-period), suggesting that the entry of qualified foreign institutional investors (QFIIs) benefited security valuation. Further, the higher valuation result is consistent with the prediction of standard international asset pricing models, that stock market liberalization may reduce the liberalizing country’s cost of equity capital by allowing for risk sharing between domestic and foreign agents. Secondly, contrary to the regulators/policymakers’ intention and empirical evidence, the liquidity proxies document mixed evidence. Lastly, this study finds mixed evidence in the price volatility measures. However, the volatility and liquidity finding suggests that the presence of foreign institutional investors is not the source of excess volatility or high turnover on local bourses. Overall, the evidence, on average, shows some signs of improvement for different market efficiency measures during the post-liberalization period compared to the pre-liberalization period. The less than expected improvement in Tadawul during the post-period implies that the Saudi financial regulator’s incentive of opening the TASI for QFIIs coincides with economic vulnerabilities for the Kingdom, stringent QFIIs regulation and weak investor protection laws.

Date: 2019
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Citations: View citations in EconPapers (3)

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DOI: 10.1080/17938120.2019.1583511

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