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Do Foreign Investors Improve Market Efficiency?

Marcin Kacperczyk, Savitar Sundaresan, Tianyu Wang

NBER Working Paper No. 24765
Issued in June 2018
NBER Program(s):Asset Pricing

We study the impact of foreign institutional investors on global capital allocation and welfare using novel firm-level international data. Using MSCI index inclusion as an exogenous shock to foreign ownership, we show that greater foreign ownership leads to more informative stock prices and this effect arises more from increased price efficiency than from improved firm governance. We further show that the impact of capital flows on price efficiency is due to real efficiency gains, as opposed to better information disclosure. Finally, we show that foreign ownership increases market liquidity, reduces firms' cost of equity, and leads to subsequent growth in their real investments, thus improving overall welfare.

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Document Object Identifier (DOI): 10.3386/w24765

 
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