Evidence on the Association between Safety, Information Asymmetry, Corporate Governance and Portfolio Preferences of Foreign Investors
Date Issued
2008
Date
2008
Author(s)
Yu-Ren, Zhang
Abstract
Since the liberation of financial system gradually removes limits of foreign ownerships, foreign investors became important roles in Taiwan stock markets. Regardless of trading value of stocks and the ratio of foreign ownerships in ownership structure of listed firm have greatly grown. This paper studies the characteristics of the foreign ownerships of firms listed in Taiwan Stock Exchange and GreTai Securities market. The empirical model was to assess whether the safety, informational asymmetries and corporate governance will affect portfolio preferences of foreign investors. This study uses two way error component model and the censored regression model to examine the relationship between the various characteristic of firms and the foreign investor’s portfolio preferences. The main results of this study are summarized as follows: (1) Foreign investors consider prudence in investing in Taiwanese stock markets as essential. They favor firms with high profitability, low liability, and high cash dividend yields. (2) Information asymmetries are chief problems faced by international investors. Foreigner investors prefer to firms with larger size, longer history, cross-listing, MSCI membership, export orientation and financial statement audited by international auditing firms. (3) When managerial ownerships are lower than 60%, the increase of managerial ownerships will lead to the increase of weight on the foreign portfolio. This finding is consistent with the principal of interest convergence. However, when managerial ownerships are greater than 60%, the increase of managerial ownerships will lead to the decrease of the weight on the foreign portfolio. This finding is consistent with the entrenchment effect because controlling shareholders may entrench outside stockholders. In contrast, foreign investors prefer to hold the firms with the outside block-holders to bind managers. (4) There is a negative relationship between share as collateral by the board of directors and preferences of the portfolio held by foreign investors. Foreign investors do not prefer to hold the firms with higher ratio of pledged director ownership, which implied that foreign investors will avoid to holding the firms with potential agency problems.
Subjects
Safety
Information asymmetry
Market portfolio
Corporate governance
Foreigner ownership
File(s)![Thumbnail Image]()
Loading...
Name
index.html
Size
23.27 KB
Format
HTML
Checksum
(MD5):deba0a75dca4da56288a8e4a2dfc24ff