Local and Foreign Investments
Ding_Guedhami_Ni_Pittman_2016
- How can foreign institutional investors invest in China A-share market? Why do they have a greater disadvantage investing in state-owned enterprises (SOEs) than in non-state-owned enterprises (non-SOEs)?
Institutional investors can invest in China through joining the Qualified Foreign Institutional Investors (QFFI), a program which allows foreign investors invest in the A-share market of China. The program allows foreigners to invest in any State Owned Enterprises (SOE), and also protects them from any problems that they may be likely to face (Xiaoya et al, 2016). This consequently enables foreigners to own shares in different SOE in China without any problem whatsoever. Foreign investors have a disadvantage in investing in SOE, simply because the QFFI program does not allow a single investor to own more than 10% of a company’s total share. This consequently implies that, all share owned by foreign investors should exceed 30% of A-shares in a company’s total shares. On the other hand, of foreign investors are free to invest in non-state owned enterprises and they can be able to own more than 50% of the total shares in the company.
- How does effective monitoring measured as board independence and auditor quality play a role on the relative informational advantage of foreign and local investors?
Effective monitoring helps in regulating the types of investments that both locals and foreigners make, hence making it easy for both local and foreign investors to be able to enjoy the privileges that they are supposed to enjoy without favoritism (Xiaoya et al, 2016). Moreover, investors’ rights are guaranteed be it in SOE OR non-SOE. Thus both local and foreign investors conduct free investments at ease without having to affect each other in one way or the other.
Ding_Ni_Rahman_Saadi_2015
- What is the channel through which growth in housing prices relates to firms’ cost of equity capital? Please explain.
Capital budgeting is the channel through which growth in housing prices reflects the cost of equity capital. When the capital is budgeted for according to the economic effects of a country, it helps in balancing the cost of equity capital, and hence impacting the company positively (Xiaoya et al, 2016).
- In the paper the authors use a different model to estimate the cost of equity than CAPM. What is the new model? Why is it chosen over CAPM that relies on ex-post realized returns?
The new model used by the author is the GLS model, GLS model is used simply because values do not need to be assigned to the risk free rate of return, the market returns and the premium equity risk (Xiaoya et al, 2016). This consequently made it easy for the author to be able to understand the effects that the economy has on the growth in housing prices, moreover, the model also accounted for the effects of stock repurchases.
Ding_Ni_Zhong_2016
- What is free float? What is liquidity? What is the primary liquidity measure in this study? Why is higher level free float associated with higher liquidity?
Free float is the amount of remaining shares which are accessible by the public through trade. On the other hand, liquidity is the ability to trade huge amounts of quantities at a lower price, without having to alter the prices (Xiaoya, Yang & Ligang, 2015). Primary liquidity measure in this study is the returns realized after the sale of huge amounts of quantities at a lower price without altering the prices. Higher levels of free float lead to less demand, which in turn makes the company to decrease the prices of the shares and thus making most people to buy the shares, hence leading to higher liquidity.
- Economic development and legal system vary substantially across developed and emerging markets. How does country level governance play a mediating role on the relationship between free float and liquidity and why?
Countries which are better governed, possess a stronger investor protection rights and hence lead to the reduction of discounts, thus creating a stronger relationship between liquidity and free float in the country (Xiaoya, Yang & Ligang, 2015). On the other hand, in countries with poor levels of governance, it makes it hard for the investors to be able to operate freely hence, investors only work with the clients who have been informed. This move leads to decrease in free float which in turn leads to low levels of liquidity.
Reference
Xiaoya, D. Yang N. & Ligang Zhong. (2015). Free Float and Market Liquidity Around the World: Journal of Empirical Finance.
Xiaoya, D. Yang N. Omrane G. & Jeffrey A Pittman. (2016). Where do Local and Foreign Investors Lose their Edge? The Mediating Role of State Ownership in Shaping Investors Relative Information Advantage.
Xiaoya, D. Yang N. Abdul Rahman. & Samir Saadi. (2013). Housing Price Growth and the Cost of Equity Capital: Journal of Banking and Finance.
