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Domestic and Foreign Institutional Investor Behavior in China

Domestic and Foreign Institutional Investor Behavior in China. Liu, Bredin, Wang & Yi Discussion by: Timo Korkeam äki Hanken School of Economics. Summary.

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Domestic and Foreign Institutional Investor Behavior in China

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  1. Domestic and Foreign Institutional Investor Behavior in China Liu, Bredin, Wang & Yi Discussion by: Timo Korkeamäki Hanken School of Economics

  2. Summary • The authors compare institutional holdings of Qualified Foreign Institutional Investors and domestic institutions in the Chinese stock market • The results suggest that: • Foreign institutions tend to invest in industries where local knowledge is less important, whereas local institutions diversify their holdings more broadly • Corporate governance is important only for foreign institutions

  3. General comments • An interesting and well-motivated topic • The institutional setting is fairly well described • Issues explaining participation in the A-share market could be further explored/explained • Most importantly, differences in availability of A and B shares, and enforcement of the ban to invest in both types • Is arbitrage possible between ADRs and A-shares? • Are A-shares still informationally less efficient? • How binding are the investment quotas, and do QFIIs vary their investment levels a lot over time?

  4. Literature background • The paper approaches the topic from a foreign investment viewpoint • Why not consider literature on institutional holdings more broadly • Gompers and Metrick (2001), and numerous subsequent papers • E.g. Dahlquist and Robertsson (2001) note that foreign investors in Sweden behave like institutional investors in the U.S. • Also, Ferreira and Matos (2008) provide findings on institutional investment on a global basis • Van Niuwerburgh and Veldkamp (2009, 2010) combine info processing choice and portfolio choice – leading to home bias

  5. Specific comments • Why are dividends not included, given their importance in explaining inst. ownership elsewhere? • Wouldn’t beta or total risk still be better than operating leverage in measuring firm risk? • Use of accounting data also makes assumptions about quality of the data • Your operating leverage measure is not independent of financial leverage • Would an electric utility be riskier than a software firm? • Other “missing variables”: • Foreign sales, index memberships, foreign listing (e.g. Covirg, et al., 2006)

  6. Specific comments • What is reported in Table 5? • If Panel A reports the number of firms with holdings, what is the E(# firms w/ holdings) in market portfolio? • What about # shares in Panel B? • Does Table 6 report averages for any firms with QFII/Domestic holdings>0?

  7. Specific comments • Is “partial R2” a good indicator of variables to be included in your full model? • How is the dependent variable defined in you regressions? • If it is the size of the investment, it is not surprising that size of the firm is positively connected to it • Size of the coefficients suggests a scaling problem • Should use the % of market cap held by QFII/domestic funds as dep. var.

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