The Impact of Foreign Investors on the Informational Content of Stock Prices

Abstract

In this study, I use the admission of Chinese A-shares in the MSCI as an exogenous shock event to test the impact of stock market liberalization that allows foreign investors to enter on the information content of stock prices as well as on stock market efficiency. My study shows that the entry of foreign investors improves the stock prices informativeness in two ways. One is that foreign investors incorporate more information into stock prices through their trading activities, and foreign investors complement the information of local investors, thus improving the information content of stock prices. The second is that foreign investors can also indirectly improve the information efficiency of stock prices by optimizing corporate governance mechanisms that enable firms to better disclose information.