Working Paper: NBER ID: w24765
Authors: Marcin Kacperczyk; Savitar Sundaresan; Tianyu Wang
Abstract: 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.
Keywords: foreign institutional investors; market efficiency; price informativeness; capital allocation; welfare
JEL Codes: G11; G12; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign ownership (F23) | Price informativeness (G14) |
| Foreign ownership (F23) | Market liquidity (G19) |
| Foreign ownership (F23) | Cost of equity (G12) |
| Foreign ownership (F23) | Real investments (G19) |
| Foreign ownership (F23) | Welfare (I38) |
| Price informativeness (G14) | Market liquidity (G19) |
| Price informativeness (G14) | Cost of equity (G12) |
| Price informativeness (G14) | Real investments (G19) |