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Do foreign investors improve informational efficiency of stock prices? Evidence from Japan

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  • He, Wen
  • Shen, Jianfeng

Abstract

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 1976 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.

Suggested Citation

  • He, Wen & Shen, Jianfeng, 2014. "Do foreign investors improve informational efficiency of stock prices? Evidence from Japan," Pacific-Basin Finance Journal, Elsevier, vol. 27(C), pages 32-48.
    • Handle: RePEc:eee:pacfin:v:27:y:2014:i:c:p:32-48
    DOI: 10.1016/j.pacfin.2014.01.005
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    More about this item

    Keywords

    Foreign investors; Foreign investor trading; Price efficiency; Institutional investors; Japan;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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