Influence of Corporate Information Transparency on Foreign Institutional Investors' Shareholding Behavior: Evidence from Public Listed Companies in China
Abstract
In 2003, China implemented the Qualified Foreign Institutional Investor (QFII) system, which has garnered considerable interest from international institutional investors in the mainland market. As global investors, QFIIs depend significantly on precise, thorough information to bolster their investing criteria. Consequently, the transparency of corporate information becomes a crucial factor for QFIIs. However, due to the relatively late development of the Chinese market, an imbalanced structure of listed companies and information asymmetry, the information disclosure of listed companies has been subject to certain degrees of distortion. Therefore, to better facilitate the development of China's securities market and to help QFIIs fully realize their advanced value investment strategies, this paper aims to study the impact of corporate information transparency on the stockholding behavior of foreign institutional investors. This paper begins by reviewing the literature on the factors influencing institutional investor holdings, corporate transparency, and the characteristics of foreign institutional investors' stockholding. It then defines the concepts of corporate information transparency and foreign institutional investors, analyzes the current state of information transparency in Chinese listed companies, and examines the development of the QFII system in China. The theoretical framework explores the mechanisms through which corporate information transparency influences the stockholding behavior of foreign institutional investors. In the empirical analysis, the paper plans to measure the information transparency of listed companies from three perspectives: earnings quality, information ratings by the Shenzhen Stock Exchange, and the number of analyst followings, to investigate how corporate information transparency influences QFII stockholding behavior.
Downloads
References
Aggarwal, R., Klapper, L., & Wysocki, P. (2005). Portfolio preferences of foreign institutional investors. Journal of Corporate Finance, 29(12), 2919–2946. DOI: https://doi.org/10.1016/j.jbankfin.2004.09.008
Al-Duais, S. D., Malek, M., Abdul Hamid, M. A., & Almasawa, A. M. (2022). Ownership structure and real earnings management: Evidence from an emerging market. Journal of Accounting in Emerging Economies, 12(2), 380–404. DOI: https://doi.org/10.1108/JAEE-01-2021-0008
Almazan, A., Hartzell, J. C., & Starks, L. T. (2005). Active institutional shareholders and costs of monitoring: Evidence from executive compensation. Financial Management, 34(4), 5-34. DOI: https://doi.org/10.1111/j.1755-053X.2005.tb00116.x
Armstrong, M. (2018). Armstrong's job evaluation handbook: a guide to achieving fairness and transparency in pay and reward. Kogan Page Publishers.
Ascioglu, A., Hegde, S. P., Krishnan, G. V., & McDermott, J. B. (2012). Earnings management and market liquidity. Review of Quantitative Finance and Accounting, 38, 257-274. DOI: https://doi.org/10.1007/s11156-010-0225-9
Badrinath, S. G., Gay, G. D., & Kale, J. R. (1989). Patterns of institutional investment, prudence, and the managerial" safety-net" hypothesis. Journal of Risk and Insurance, 605-629. DOI: https://doi.org/10.2307/253449
Bae, K.-H., & Goyal, V. (2010). Equity market liberalization and corporate governance. Journal of Corporate Finance, 16(5), 609-621. DOI: https://doi.org/10.1016/j.jcorpfin.2010.08.008
Bai, X., Dong, Y., & Hu, N. (2019). Financial report readability and stock return synchronicity. Applied Economics, 51(4), 346-363. DOI: https://doi.org/10.1080/00036846.2018.1495824
Ball, R. (2016). Why we do international accounting research. Journal of International Accounting Research, 15(2), 1-6. DOI: https://doi.org/10.2308/jiar-51403
Bekaert, G., & Harvey, C. (2001). Corporate governance in Italy after the 1988 reform: What role for institutional investors? Corporate Ownership & Control, 2, 11-31. DOI: https://doi.org/10.22495/cocv2i4p1
Bhattacharya, U., Hackethal, A., Kaesler, S., Loos, B., & Meyer, S. (2012). Is unbiased financial advice to retail investors sufficient? Answers from a large field study. The Review of Financial Studies, 25(4), 975-1032. DOI: https://doi.org/10.1093/rfs/hhr127
Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency?. Journal of accounting and economics, 48(2-3), 112-131. DOI: https://doi.org/10.1016/j.jacceco.2009.09.001
Brennan, N. (1999). Voluntary disclosure of profit forecasts by target companies in takeover bids. Journal of Business Finance & Accounting, 26(7?8), 883-917. DOI: https://doi.org/10.1111/1468-5957.00279
Brennan, M. J., & Subrahmanyam, A. (1995). Investment analysis and price formation in securities markets. Journal of Financial Economics, 38(3), 361-381. DOI: https://doi.org/10.1016/0304-405X(94)00811-E
Brown, S., & Hillegeist, S. A. (2007). How disclosure quality affects the level of information asymmetry. Review of Accounting Studies, 12, 443-477. DOI: https://doi.org/10.1007/s11142-007-9032-5
Bushman, R. M., Piotroski, J. D., & Smith, A. J. (2004). What determines corporate transparency? Journal of Accounting Research, 42(2), 207-252. DOI: https://doi.org/10.1111/j.1475-679X.2004.00136.x
Bushee, B. J. (2001). Do institutional investors prefer near-term earnings over long-run value? Contemporary Accounting Research, 18(2), 207–246. DOI: https://doi.org/10.1092/J4GU-BHWH-8HME-LE0X
Chen, C. J., & Jaggi, B. (2000). Association between independent non-executive directors, family control and financial disclosures in Hong Kong. Journal of Accounting and Public Policy, 19(4-5), 285-310. DOI: https://doi.org/10.1016/S0278-4254(00)00015-6
Cui, D. (2018). Investor Recognition and Post?Acquisition Performance of Acquirers. Financial Review, 53(3), 569-604. DOI: https://doi.org/10.1111/fire.12166
Dahlquist, M., Pinkowitz, L., Stulz, R. M., & Williamson, R. (2003). Corporate governance and the home bias. Journal of Financial and Quantitative Analysis, 38(1), 87-110. DOI: https://doi.org/10.2307/4126765
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35-59. DOI: https://doi.org/10.2308/accr.2002.77.s-1.35
Del Guercio, D. (1996). The distorting effect of the prudent-man laws on institutional equity investments. Journal of Financial Economics, 40(1), 31-62. DOI: https://doi.org/10.1016/0304-405X(95)00841-2
Dye, R. A. (1988). Earnings management in an overlapping generations model. Journal of Accounting research, 195-235. DOI: https://doi.org/10.2307/2491102
Eakins, S. G., Stansell, S. R., & Buck, J. F. (1998). Analyzing the nature of institutional demand for common stocks. Quarterly Journal of Business and Economics, 33-48.
Falkenstein, E. G. (1996). Preferences for stock characteristics as revealed by mutual fund portfolio holdings. The Journal of Finance, 51(1), 111-135. DOI: https://doi.org/10.1111/j.1540-6261.1996.tb05204.x
Fedenia, M., Shafer, S., & Skiba, H. (2013). Information immobility, industry concentration, and institutional investors’ performance. Journal of Banking & Finance, 37(6), 2140-2159. DOI: https://doi.org/10.1016/j.jbankfin.2013.01.034
Ferreira, A. I., Martinez, L. F., Rodrigues, R. I., & Ilhéu, C. (2017). The impact of human resources practices on consumers’ investment intentions: A study in the financial sector. Employee Relations, 39(4), 475-486. DOI: https://doi.org/10.1108/ER-05-2016-0097
Fan, J. P., Guan, F., Li, Z., & Yang, Y. G. (2014). Relationship networks and earnings informativeness: Evidence from corruption cases. Journal of Business Finance & Accounting, 41(7-8), 831-866. DOI: https://doi.org/10.1111/jbfa.12078
Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The market pricing of accruals quality. Journal of Accounting and Economics, 39(2), 295-327. DOI: https://doi.org/10.1016/j.jacceco.2004.06.003
Gray, S. J., & Vint, H. M. (1995). The impact of culture on accounting disclosures: some international evidence. Asia-Pacific Journal of Accounting, 2(1), 33-43. DOI: https://doi.org/10.1080/10293574.1995.10510476
Gao, L., He, S., & Huang, Z. (2006). Corporate governance and tunneling. Quarterly Journal of Economics, (03), 1157-1178.
Gillan, S. L., & Laura, T. (2003). Corporate governance, corporate ownership, and the role of institutional investors: A global perspective. Social Science Research Network, 13(2), 4-13. DOI: https://doi.org/10.2139/ssrn.439500
Gompers, P. A., & Metrick, A. (2001). Institutional investors and equity prices. The Quarterly Journal of Economics, 116(1), 229-259. DOI: https://doi.org/10.1162/003355301556392
Hartzell, J. C., & Starks, L. T. (2003). Institutional investors and executive compensation. Journal of Finance, 58(6), 2351-2374. DOI: https://doi.org/10.1046/j.1540-6261.2003.00608.x
Healy, P. M., & Palepu, K. G. (2001). A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1-3), pp. 405–440. DOI: https://doi.org/10.1016/S0165-4101(01)00018-0
Hope, O. K. (2003). Firm?level disclosures and the relative roles of culture and legal origin. Journal of International Financial Management & Accounting, 14(3), 218-248. DOI: https://doi.org/10.1111/1467-646X.00097
Huang, X., & Shi, Q. (2013). Explaining the performance of Chinese equity funds. Paper presented at the 21st Pacific-Basin Finance, Economics, Accounting and Management Conference, 4-5 July 2013.
Hu, J., Tang, Y., Yin, N., & Guo, X. (2024). Institutional investor information competition and accounting information transparency: Implications for financial markets and corporate governance in China. Journal of the Knowledge Economy, 15(2), 9629-9666. DOI: https://doi.org/10.1007/s13132-023-01482-8
Hong, J., & Fang, J. (2005). Related-party transactions and the value relevance of accounting earnings. China Accounting Review, (01), 87-98.
Hossain, M., Perera, M. H. B., & Rahman, A. R. (1995). Voluntary disclosure in the annual reports of New Zealand companies. Journal of International Financial Management & Accounting, 6(1), 69-87. DOI: https://doi.org/10.1111/j.1467-646X.1995.tb00050.x
Jaggi, B., & Low, P. Y. (2000). Impact of culture, market forces, and legal system on financial disclosures. The International Journal of Accounting, 35(4), 495-519. DOI: https://doi.org/10.1016/S0020-7063(00)00076-5
Jayaraman, S. (2008). Earnings volatility, cash flow volatility, and informed trading. Journal of Accounting Research, 46(4), 809-851. DOI: https://doi.org/10.1111/j.1475-679X.2008.00293.x
Jegadeesh, N., & Kim, W. (2006). Value of analyst recommendations: International evidence. Journal of Financial Markets, 9(3), 274-309. DOI: https://doi.org/10.1016/j.finmar.2006.05.001
Jiang, X. (2004). Corporate governance and institutional investors’ shareholding. Nankai Business Review, (1), 34-45.
Jin, D., Wang, H., Wang, P., & Yin, D. (2016). Social trust and foreign ownership: Evidence from qualified foreign institutional investors in China. Journal of Financial Stability, 23, 1-14. DOI: https://doi.org/10.1016/j.jfs.2016.01.007
Kang, J. K., & Stulz, R. M. (1997). Is bank-centered corporate governance worth it? A cross-sectional analysis of the performance of Japanese firms during the asset price deflation. DOI: https://doi.org/10.3386/w6238
Kassi, D. F., Li, Y., & Dong, Z. (2023). The mitigating effect of governance quality on the finance?renewable energy?growth nexus: Some international evidence. International Journal of Finance & Economics, 28(1), 316-354. DOI: https://doi.org/10.1002/ijfe.2423
Khanna, T., Palepu, K. G., & Srinivasan, S. (2004). Disclosure practices of foreign companies interacting with US markets. Journal of Accounting Research, 42(2), 475-508. DOI: https://doi.org/10.1111/j.1475-679X.2004.00146.x
Kepler, J. D., Nikolaev, V. V., Scott-Hearn, N., & Stewart, C. R. (2024). Quality transparency and healthcare competition. Available at SSRN 3963418.
Kim, O., & Verrecchia, R. E. (1994). Market liquidity and volume around earnings announcements. Journal of Accounting and Economics, 17(1-2), 41-67. DOI: https://doi.org/10.1016/0165-4101(94)90004-3
Ko, K., Kim, K., & Cho, S. H. (2007). Characteristics and performance of institutional and foreign investors in Japanese and Korean stock markets. Journal of the Japanese and International Economies, 21(2), 195-213. DOI: https://doi.org/10.1016/j.jjie.2005.11.002
Knyazeva, A., Knyazeva, D., & Kostovetsky, L. (2015). Investor heterogeneity and trading around earnings announcements. Source has to be specified.
Lang, M., Lins, K. V., & Maffett, M. (2012). Transparency, liquidity, and valuation: International evidence on when transparency matters most. Journal of Accounting Research, 50(3), 729–774. DOI: https://doi.org/10.1111/j.1475-679X.2012.00442.x
Lang, M. H., & Lundholm, R. J. (2000). Voluntary disclosure and equity offerings: reducing information asymmetry or hyping the stock?. Contemporary Accounting Research, 17(4), 623-662. DOI: https://doi.org/10.1506/9N45-F0JX-AXVW-LBWJ
Lee, J. H. (2021). Earnings quality, foreign investors, and dividends. Journal of Derivatives and Quantitative Studies, 30(1), 58–72. DOI: https://doi.org/10.1108/JDQS-07-2021-0018
Lel, U. (2019). The role of foreign institutional investors in restraining earnings management activities across countries. Journal of International Business Studies, 50(6), 895-922. DOI: https://doi.org/10.1057/s41267-018-0195-z
Leuz, C., Lins, K. V., & Warnock, F. E. (2009). Do foreigners invest less in poorly governed firms? Review of Financial Studies, 22(8), 3245-3285. DOI: https://doi.org/10.1093/rfs/hhn089
Li, Z., Wang, B., Wu, T., & Zhou, D. (2021). The influence of qualified foreign institutional investors on internal control quality: Evidence from China. International Review of Financial Analysis, 78, 101916. DOI: https://doi.org/10.1016/j.irfa.2021.101916
Li, C. T., Liu, B. B., Zhou, P., & Zhang, X. (2018). The stone from another mountain: QFII and information disclosure of listed companies. Financial Research, (12), pp. 138–156.
Li, J. (2012). Comment on "Institutions and the information environment of Chinese listed firms". National Bureau of Economic Research, Inc.
Lin, Z., & Ding, C. J. (2024). Supervision by Distracted Institutional Investors and Majority Shareholder Tunnelling: Causal Evidence from China. Asia-Pacific Financial Markets, 1-32. DOI: https://doi.org/10.1007/s10690-024-09495-2
Liu, N., Bredin, D., & Cao, H. (2020). The investment behavior of Qualified Foreign Institutional Investors in China. Journal of Multinational Financial Management, 54, 100619. DOI: https://doi.org/10.1016/j.mulfin.2020.100614
Luong, H., Moshirian, F., Nguyen, L., Tian, X., & Zhang, B. (2017). How do foreign institutional investors enhance firm innovation? Journal of Financial & Quantitative Analysis, 52(4), 1449-1490. DOI: https://doi.org/10.1017/S0022109017000497
Lu, Y. (2006). Information transparency and listed company effects. China CPA, (11), 67-70.
Manogna, R. L., & Mishra, A. K. (2021). Does corporate governance characteristics influence firm performance in India? Empirical evidence using dynamic panel data analysis. International Journal of Disclosure and Governance, 18(1), 71-82. DOI: https://doi.org/10.1057/s41310-020-00098-7
Miletkov, M. K., Poulsen, A. B., & Wintoki, M. B. (2014). The role of corporate board structure in attracting foreign investors. Journal of Corporate Finance, 29, 143-157. DOI: https://doi.org/10.1016/j.jcorpfin.2014.06.005
Pan, Y., & Xin, Q. (2004). Understanding enterprise information needs—An exploration based on institutional investors’ information demand. Accounting Research, (12), 14-22+97.
Piotroski, J. D., & Wong, T. J. (2012). Institutions and information environment of Chinese listed firms. Capitalizing China, 2, 201-242. DOI: https://doi.org/10.7208/chicago/9780226237268.003.0005
Rao, Y., Xu, J., Mei, L., & Liu, M. (2013). The impact of QFII holdings on stock price synchronicity in China’s stock market. Journal of Management Science, (02), 202-208.
Richardson, V. J. (1997). An empirical investigation of the relationship between information asymmetry and earnings management. University of Illinois at Urbana-Champaign.
Roque, V., & Cortez, M. C. (2014). The determinants of international equity investment: Do they differ between institutional and noninstitutional investors?. Journal of Banking & Finance, 49, 469-482. DOI: https://doi.org/10.1016/j.jbankfin.2014.06.015
Roulstone, S. (2015). Exploring the relationship between client perspectives, clinical expertise and research evidence. International Journal of Speech-Language Pathology, 17(3), 211-221. DOI: https://doi.org/10.3109/17549507.2015.1016112
Roychowdhury, S. (2010). Discussion of “Acquisition profitability and timely loss recognition” by J. Francis and X. Martin. Journal of Accounting and Economics, 49(1-2), 179-183. DOI: https://doi.org/10.1016/j.jacceco.2009.11.003
Schuppli, M., & Bohl, M. T. (2010). Do foreign institutional investors destabilize China's A-share markets? Journal of International Financial Markets, Institutions & Money, 20(1), 36-50. DOI: https://doi.org/10.1016/j.intfin.2009.10.004
Song, Y., Yang, X., & Wang, S. (2013). Analysis of the impact of the QFII system on China's securities market. Commercial Accounting, (10), 96-98.
Sun, L., & Lin, L. (2006). Empirical Analysis of QFII's Investment in China's Mainland Securities Market. Financial Research, 07, 123-133.
Sun, X., Pan, Z., & Li, J. (2017). Does QFII improve the pricing efficiency of A-shares in China? An empirical analysis based on data from the Shanghai and Shenzhen stock exchanges. Journal of Commercial Research, (07), 56-67.
Tang, Y., & Song, Y. (2010). Value selection vs. value creation—Evidence from institutional investors in China’s market. Quarterly Journal of Economics, (02), 609-632.
Wang, S. S., & Jiang, L. (2004). Location of trade, ownership restrictions, and market illiquidity: Examining Chinese A-and H-shares. Journal of Banking & Finance, 28(6), 1273-1297. DOI: https://doi.org/10.1016/S0378-4266(03)00119-5
Wang, K., & Xiao, X. (2005). Empirical Study on Institutional Investors' Holdings and Related Party Occupation. Nankai Management Review, (02), 27-33.
Wang, Y. P., Liu, H. L., & Wu, L. S. (2009). Information transparency, institutional investors, and stock price synchronicity. Financial Research, (12), 162-174.
Wang, X., Fang, W., & Liu, Z. (2013). The correlation between QFII holdings and the performance of listed companies: An empirical analysis based on QFII holdings data from 2009–2011. Journal of Shenzhen University (Humanities & Social Sciences), (03), 87-91+73.
Wei, L. (2021). A study on the impact of QFII shareholding on corporate behavior (Doctoral dissertation, Zhongnan University of Economics and Law).
Welker, M. (1995). Disclosure policy, information asymmetry, and liquidity in equity markets. Contemporary Accounting Research, 11(2), 801-827. DOI: https://doi.org/10.1111/j.1911-3846.1995.tb00467.x
Xin, Q., Kong, D., & Hao, Y. (2014). Corporate transparency and stock price volatility. Financial Research, (10), 193-206.
Xu, H., Shi, N., Ma, S. H., & Lai, K. K. (2010). Contracting with an urgent supplier under cost information asymmetry. European Journal of Operational Research, 206(2), 374-383. DOI: https://doi.org/10.1016/j.ejor.2010.03.012
Ye, D. (2009). A study on the correlation between QFII holdings and the performance of listed companies. Finance & Accounting Monthly, (09), 87-89.
Yu, F. F. (2008). Analyst coverage and earnings management. Journal of financial economics, 88(2), 245-271. DOI: https://doi.org/10.1016/j.jfineco.2007.05.008
Zhang, L., Mol, A. P., & He, G. (2016). Transparency and information disclosure in China's environmental governance. Current Opinion in Environmental Sustainability, 18, 17-24. DOI: https://doi.org/10.1016/j.cosust.2015.03.009
Zhang, Y. (2024). China's steady economic growth contributes positively to world economic development. China Report, (02), 96.
Zeng, C., & Zhu, L. (2019). The impact of QFII on innovation investment and corporate value. Science & Technology Progress and Policy, (05), 86-95.
Zhou, Z. J., & Wang, Q. (2013). Who Attracts the Attention of Foreign Investors- Empirical Evidence Based on QFII Holdings of Chinese Listed Companies. Investment Research, 03, 123–138.
Zhou, B., Cheng, L., & Liu, X. (2024). QFII shareholding, information access, and corporate asset mismatching. Finance Research Letters, 61, 105009. DOI: https://doi.org/10.1016/j.frl.2024.105009
Copyright (c) 2024 Yang Yaojing, Nor Farradila Abdul Aziz, Maryam Jameelah Mohd Hashim
This work is licensed under a Creative Commons Attribution 4.0 International License.
Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of revised paper in the light of suggestions of the reviewers, the editorial team edits and formats manuscripts to bring uniformity and standardization in published material.
This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.
