Local Effects of Foreign Ownership in an Emerging Financial Market: Evidence from Qualified Foreign Institutional Investors in Taiwan

We examine the local effects of equity ownership by investors who are classified as qualified foreign institutional investors in Taiwan. Our empirical analyses reveal a pronounced foreign ownership effect, whereby stocks with high foreign ownership outperform stocks with low foreign ownership. The valuation effect is present even after controlling for firm export, size, or transparency levels. We pursue a performance-based explanation for this effect and find that foreign ownership is strongly and positively associated with firm R&D expenditures and contemporaneous and subsequent firm performance. Our evidence is consistent with foreign investors who enjoy a long-run information advantage over domestic investors.