Do Foreign Investors Improve Informational Efficiency of Stock Prices? Evidence from Japan

Download or read book Do Foreign Investors Improve Informational Efficiency of Stock Prices? Evidence from Japan written by Wen He and published by . This book was released on 2014 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates the impact of foreign investors on the informational efficiency of stock prices in local markets. Using a large sample of Japanese firms over the period 1975 to 2008, we find that prices deviate less from a random walk for stocks with a large change in foreign ownership. This relation is robust to controls for local institutional ownership, stock liquidity, and firm fixed effects. Granger causality tests show that changes in foreign investor trading predict changes in price efficiency in the next period, but not vice versa. Finally, we use a quasi-natural experiment to show that an increase in foreign ownership causes an improvement in price efficiency. Collectively, these results suggest that foreign investors improve price efficiency in local stock markets.