How Foreign Institutional Investors’ Ownership Affects Stock Liquidity? Evidence from China

Abstract

Our paper investigates how qualified foreign institutional investors (QFII) impact stock liquidity in the Chinese A-share market using data for 2005 to 2019. Contrary to previous findings, we find that QFII enhance stock liquidity. Specifically, QFII’s participation is negatively associated with the individual stock illiquidity and positively related to stock trading volume. Moreover, using a step-by-step procedure, we provide evidence that QFII raises stock liquidity by ameliorating information asymmetry. QFII will attract more market attention and improve firm disclosure quality. We address possible endogeneity with fixed effects and instrumental variables, and our findings are robust to self-selection bias, stock market shocks, and alternative explanatory variables.