The effect of information asymmetry on foreign ownership in the US stock markets
No Thumbnail Available
URL
Journal Title
Journal ISSN
Volume Title
School of Business |
Master's thesis
Authors
Date
2019
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
63
Series
Abstract
In this thesis, I study the effect of information asymmetry on foreign ownership in the US stock markets. Existing literature finds mainly that foreign investors are at an informational disadvantage compared to domestic investors. To overcome these information asymmetries, foreign investors invest typically in stocks that have characteristics associated with low information asymmetry. Hence, I hypothesize that the relation between information asymmetry and foreign ownership is negative. My main contribution is, first, to empirically examine the general relationship between these two variables by using multiple proxies for asymmetric information. Second, I test the causal effect of information asymmetry on foreign ownership in a quasi-natural experiment setting of exogenous brokerage closures. Third, I examine whether the causal effect is pronounced in firms with low analyst coverage or institutional ownership. The data sample of the study consists of US listed stocks in the period of 1997 – 2017. The empirical results provide strong evidence for a negative relationship between asymmetric information and foreign ownership. When compared to a whole market of investors, stockholdings and the number of foreign institutional investors are strongly negatively correlated with asymmetric information. In addition, when compared to institutional investors, there is a negative, although less pronounced, relation between the aforementioned variables. To test the causal effect, I identify firms that are exposed to exogenous information asymmetry shocks as the treatment group and non-exposed as the control group. I examine the differential effects of the treatment between these groups before and after the shock events, by using difference-in-differences regression models with year and industry fixed effects. Based on the results, there is no evidence of causality between information asymmetry and foreign ownership. Furthermore, there is no evidence of the pronounced negative causal effect in firms with low analyst coverage and institutional ownership. The results are not altered when conducting several robustness tests such as a subset analysis of foreign institutional investor types, an alternative selection of control group or a use of instrumental variables for information asymmetry. Nonetheless, it is difficult to make definitive conclusions about causality, since the thesis does not address the potential reverse causality between the variables.Description
Thesis advisor
Lof, MatthijsKeywords
foreign ownership, information asymmetry, causality, stock markets