Foreign Equity Ownership and Information Asymmetry: Evidence from Japan

Abstract

Using a large sample of Japanese firms, we investigate whether the level of foreign ownership in a firm is inversely related to information asymmetry between firm (managers) and market (outside investors). Since information asymmetry is not directly observable and, thus, is difficult to measure empirically, our analysis focuses on the link between foreign shareholding and a measurable consequence of information asymmetry; that is, the timing and magnitude of intertemporal return-earnings associations. The empirical results support our hypothesis, and subsequent tests based on residual foreign ownership show that the relation between foreign ownership and information asymmetry is robust to the addition of various control variables such as market capitalization and cross-corporate holdings. We also show that foreign investors tend to avoid stocks with high cross-corporate holdings. Overall, our results suggest that foreign (institutional) investors are likely to be efficient processors of public information and are attracted to Japanese firms with low information asymmetry.

Corporate Governance and Non-Jordanian Share Ownership: the Case of Amman Stock Exchange

“…This result is consistent with previous studies such as Jiang & Kim (2004) and Managen & Tauringana (2007). Additionally, the result showed positive relation between foreign share ownership and international audit firm, though, at 10% significance level.…”

“…Lin and Shiu (2003), Jiang and Kim (2004) and Al-Najjar (2010) provided evidence supporting a positive relationship between foreign ownership and company size. Managen and Tauringana (2007) also indicated that return on equity was positively associated with foreign share ownership.…”

Foreign Ownership and Information Asymmetry

“…While Jiang and Kim (2004) and Grinblatt and Keloharju (2000) show that foreign investors may have certain informational advantage over domestic investors in Japan and Finland, respectively, Choe et al (2005) show that domestic investors appear to have an informational edge in Korea.…”

“…If so, foreign investors could be associated with a firm with low information asymmetry (Jiang and Kim, 2004). In this case, an increase in foreign ownership leads to an increased demand and pressure for increased disclosure by local firms, resulting in higher value relevance of accounting information (Sami and Zhou, 2004), strengthening shareholder activism and board representation (Choi et al, 2007), greater deployment of sophisticated valuation methods (Wei et al, 2005), or enhancing the privatization process of state-owned enterprises .…”

The Impact of Effective Corporate Boards and Audit Committees on Attracting Foreign Ownership in Listed Companies in the Gulf Cooperation Council

“…Ajinkya, Bhojrajand Sengupta (2005) indicated that effective corporate governance can constrain corporate managers and/or controlling shareholders from expropriating other investors by ensuring an environment of greater transparency through better monitoring; thus foreign investors will be likely to be more dependent on an effective corporate governance structure. This study is motivated by the fact that most of the previous studies on foreign ownership have been conducted in developed countries with low ownership concentration (e.g.,Aggarwal, Klapper, &Wysocki, 2005;Bowman & Min, 2012;Dahlquist&Robertsson, 2001;Jiang & Kim, 2004;Kang, 1997;Miletkov et al, 2014;Min & Bowman, 2015). Their results indicate that foreign investors are more attracted to large firms with high book-to-market ratio, low leverage and high independence of the board of directors as well as the audit committee.…”