Direct foreign ownership, institutional investors, and firm characteristics

1
Direct foreign ownership, institutional
investors, and firm characteristics

• Dahlquist and Robertsson, 2001

2
Introduction

• Foreign Ownership structure and firms
  performance
• Home Bias
• Governance

3
Motivation

• Kang and Stulz (1997) Foreign investment in
  Japan tend to underweight smaller and highly
  leveraged firms - information
• Grinblatt and Keloharju (2000) Domestic
  investors take the opposite position of
  foreigners.
• Choe, and others (1999) Korean institutions
  behave like foreign investors.

4
Contributions

• Identify various firm attributes common to
  foreign ownership, using Swedish firms.
• Type of foreign investors is an important aspect
  with respect to trading and ownership.
• Compare foreign ownershiup with domestic holding
  by different categories.

5
Results

• Foreign ownership seems to be positively related
  to
• market cap firm recognition and information
• Listing in international stock exchanges
• familiarity breeds investment
• 2. Discriminate between foreign and institutional
  holdings
• Foreign and institutional ownership can be
  characterized by similar attributes.
• American institutions invest in firms that are
  larger, more liquid, and had relatively low
  return during the previous year.

6
Results

• Foreign ownership examined at a disaggregate
  level, using data on a country-by-country basis.
• The sensitivity to firm attributes varies across
  different regions.
• Overall, the bias is actually an institutional
  investor bias. The results seem to be strong for
  the large U.S. investors.

7
Empirical Hypotheses

• Home equity bias investors show a preference for
  investing in their home countries.
• Compare foreign ownership with the holdings of
  domestic mutual funds, other institutional
  investors, and individual investors.

8
Empirical Hypotheses

• Investment barriers including political or
  country risks and informational asymmetries.
• Proxies for familiarity firm size, export
  sales, foreign listing.
• Investor influence (governance)
• Turnover rate in international equity investment
  is higher.
• May avoid highly concentrated firms

9
Data

• Foreign ownership of Swedish firms from 1991 to
  1997.
• - Foreign ownership increased from SEK 44 bil
  (8.2) to SEK 692 billion (32.4)
• Due to regulatory changes during the period.
• Before 1993, two classes of equiy, restricted and
  unrestricted shares. The proportion of
  unrestricted shares was limited to 20 of the
  voting rights and 40 of the equity.
• Industry data
• Engineering is the largest holding (39). 45 of
  foreign holding is here.

10
Empirical Results

• Tables 2 large firms, low BM ratios and low
  dividend (low growth stocks)
• Lower in firms with high risk, high leverage.
• Regression results in Table 3.
• Positive with size and current ratio
• Negative with dividends yield.

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Table 2. Ranking of firms based on characteristics
13
Table 3. Regression of foreign ownership on
characteristics.
14
Table 4.
15
Firm recognition and investor influence

• Why do foreign investors like large firms?
  Recognition or influence
• Export, foreign listing, turnover ratio,
  ownership concentration.
• Size, current ratio, dividend yields, exports and
  turnover.
• Foreigners prefer firms with liquidity, exports,
  low ownership, foreign listing.

16
Conclusions

• Foreign investors prefer to invest in firms with
  size, large cash, low dividend yield, exports,
  foreign listing.
• Market liquidity is an important force for the
  preference.
• The preference for large firms is common to all
  institutional investors.
• Driven by large U.S. investors.