Does foreign institutional ownership increase return volatility? Evidence from China

► We investigate the impact of foreign ownership on Chinese stock volatility. ► Foreign institutions increase firm-level stock return volatility. ► Foreign individual shareholdings exhibit volatility reduction effects. ► There is a positive relationship between domestic shareholdings and volatility....

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Bibliographic Details
Published in:Journal of banking & finance 2013-02, Vol.37 (2), p.660-669
Main Authors: Chen, Zhian, Du, Jinmin, Li, Donghui, Ouyang, Rui
Format: Article
Language:English
Subjects:
China
Equity stake
Foreign ownership
Institutional investors
Liquidity
Rates of return
Size of enterprise
Stock return volatility
Stock returns
Stockholders
Studies
Volatility
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Summary:► We investigate the impact of foreign ownership on Chinese stock volatility. ► Foreign institutions increase firm-level stock return volatility. ► Foreign individual shareholdings exhibit volatility reduction effects. ► There is a positive relationship between domestic shareholdings and volatility. ► We also suggest government ownership results in a poor governance environment. This paper investigates the impact of foreign institutional ownership on firm-level stock return volatility in China, based on our study of a sample of 1458 firms between 1998 and 2008. The empirical results show that share ownership by foreign institutions (both financial and non-financial) increases firm-level stock return volatility, even after controlling for a complete ownership structure, firm size, turnover, and leverage, and correcting for potential endogeneity problems. However, the results also show that foreign individual shareholdings reduce volatility. Furthermore, we document a positive relationship between domestic shareholdings (individual, institutional, and governmental) and firm-level stock return volatility. Empirical results with interaction terms show that foreign institutional ownership increases firm-level return volatility by strengthening the positive impact of liquidity on volatility. The volatility reduction effect of foreign individual ownership is attenuated by government ownership suggests a poor governance environment as a result of the involvement of the Chinese government.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2012.10.006