Are Non‐controlling Foreign Institutional Investors a Friend or Foe to Equity Liquidity? Evidence from China*

Abstract

China has opened its stock market to internationally renowned institutional investors but restricts their ownership. We examine whether foreign institutional investors in China, as liquidity providers with superior information, reduce information asymmetry and improve stock liquidity. Using a panel dataset of 18 173 firm–year observations from 2006 to 2015, we find that non‐controlling foreign institutional investors in China enhance liquidity. This association is more pronounced for firms with poor internal corporate governance and in underdeveloped institutional environments. Additional analysis shows our results are unlikely to be driven by reverse causality or omitted variables.