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Local Effects of Foreign Ownership in an Emerging Financial Market: Evidence from Qualified Foreign Institutional Investors in Taiwan

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  • We are grateful to an anonymous referee for detailed comments. We also thank Robert Battalio, Suzanne Bellezza, Utpal Bhattacharya, Long Chen, Edward Chow, Shane Corwin, Laura Field, Amar Gande, Andrew Ellul, Craig Holden, Jun-Koo Kang, Naveen Khanna, Wei-Lin Liu, Tim Loughran, Jennifer Marietta-Westberg, Chris Muscarella, Paul Schultz, Mark Seasholes, Rich Sheehan, Ann Sherman, Hans Stoll, Charles Trzcinka, seminar participants at Indiana University, Michigan State University, Penn State University, the 12th Conference on the Theories and Practices of Securities and Financial Market in Kaoshiung, Taiwan, the University of Notre Dame, the Vanderbilt University Financial Markets Research Center Conference, and the Western Finance Association Conference for their suggestions.

Abstract

We examine the local effects of equity ownership by investors who are classified as qualified foreign institutional investors in Taiwan. Our empirical analyses reveal a pronounced foreign ownership effect, whereby stocks with high foreign ownership outperform stocks with low foreign ownership. The valuation effect is present even after controlling for firm export, size, or transparency levels. We pursue a performance-based explanation for this effect and find that foreign ownership is strongly and positively associated with firm R&D expenditures and contemporaneous and subsequent firm performance. Our evidence is consistent with foreign investors who enjoy a long-run information advantage over domestic investors.

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