Do Foreign Investors Improve Informational Efficiency of Stock Prices?

Name:
Tutor:
Course:
Date:
Literature Survey
The article “Do foreign investors improve informational efficiency of stock prices? Evidence from Japan” by He & Shen (2012) studies the effect of overseas investment on the insightful productivity of stock prices in domestic markets. Expanding on previous studies, the authors hypothesize that foreign investors can enhance the efficiency of the stock price in the domestic market in two ways: by openly enhancing the integration of information-associated data into stock prices through knowledgeable trading and indirectly improving price efficiency through price efficiency improved corporate governance. The insightful function of overseas investors is tested using data about Japanese stocks from 1976 to 2008. The authors measured stock price efficiency using stock prices deviation from efficient prices for stocks with significant changes in terms of overseas ownership. After controlling for local institutional ownership, firm fixed effects, and stock liquidity, the authors discovered that overseas investor trading variations resulted in price efficiency changes in the subsequent period but not the other way round. The results of the study indicated that overseas investment enhances price efficiency in domestic markets.
On the other hand, the article “Characteristics and performance of institutional and foreign investors in Japanese and Korean stock markets” by Ko et al. (2007) studies the features of stock tenure by both foreign and institutional shareholders together with their impacts on Japanese and Korean stock value performance. The authors split sample stocks into three groups depending on the number of stocks owned by institutional shareholders before splitting them further into three depending on the number of stocks owned by overseas investors. After controlling for those factors that affect stock returns besides foreign and institutional ownership, the authors used the three-factor model to determine the features of both tenure securities as well as the actuality of irregular yields. The authors discovered that firm size is linked to overseas tenure than institutional tenure and that book-to-market ratio and foreign ownership are negatively linked, indicating that overseas shareholders favor stocks that grow over those that are valued. Also, the study revealed more differentiation in relation to average returns among institutional tenure holdings compared to overseas tenure holdings. Overall, the study results suggested that every independent ownership impact of either ownership portfolio on the performance of a stock only occurs in Korea and that there is a joint impact of both tenure portfolios in the two countries.
Conversely, the article, “Do foreign investors improve stock price informativeness in emerging equity markets? Evidence from Vietnam” by Vo (2017) examines the link between stock price insightfulness and overseas tenure using the Vietnam stock market. This paper is different from the other articles reviewed in that while the other two articles examined stock price informativeness in relation to more developed stock markets, this study examined the issue in the more acute context of developing equity markets with fragile institutional and regulatory structures. The author sought to understand whether overseas shareholders bring about informational insightfulness in developing markets and so inform policy formulation process in minimizing the possible adverse impacts of the same on local financial markets with fragile monitoring and formal frameworks. The study used a data set of both market and accounting information of corporations that classify as non-financial and trade in the Ho Chi Minh City exchange market between 2006 and 2015. It then applied several econometric techniques, including the company-particular return difference and market systems, to extensively evaluate the research question. The results from the analysis revealed that overseas shareholders enhance data efficiency in the Vietnamese stock exchange: the findings indicated a significant positive association between overseas tenure and stock price insightfulness, thereby concluding that overseas shareholders in emerging stock markets encourage stock insightfulness efficiency. As the findings of previous studies focused on mature markets, overseas shareholders in developing markets (characterized by volatility and weak regulatory structures) are essential for improving stock price informativeness.
The article "Stock holding decisions of foreign investors in emerging stock markets: A case study in Vietnam" by Bui (2020) is similar to the previous study in that it also focuses on the same emerging market. However, the study’s focus is on the behavior of foreign investors’ investment decisions, mainly whether there is the presence of encouraging response trading nature among overseas investors if random past shocks impact stockholding decisions of overseas shareholders, and whether stockholding decisions of overseas investors are periodic. The study used data of net value traded of overseas shareholders from the Ho Chi Minh trading market between 2005 and 2018. Using the GARCH model to analyze the data, the study found the behavior of positive feedback trading among foreign investors. It also discovered that global financial shocks affected overseas financial decisions in the Vietnam stock market and that foreign investors' stockholding decisions were not periodic. These findings are helpful because they provide valuable insights into restructuring the emerging stock markets to promote global integration and improve foreign investment.
The article, “Trading Behavior, Perf...