The effect of foreign institutional investors on corporate governance: evidence from Chinese publicly listed firms
Compared to the astonishing growth of the Chinese economy in the last 40 years, the development of its capital markets has been lagging behind. Now that the economic system is transforming from an export based and investment driven model to a consumption based and innovation driven one, an efficient stock market has never been more relevant. To promote the development of the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) the China Securities Regulatory Commission (CSRC) has implemented a range of new policies in the last decade. One of these policies aims at increasing the presence of foreign institutional investors. The objective of this thesis is therefore to analyse if the new influx of foreign investors have performed a monitoring role and improved firm level corporate governance structures. More specifically, we hypothesise that larger and long term foreign institutional investments drive corporate governance improvements. We have collected an extensive foreign ownership database and used multiple metrics to measure firm level corporate governance. Namely, we use a corporate governance index, a transparency disclosure rating, and individual corporate governance attributes. In order to alleviate endogeneity concerns, we performed a variety of empirical tests, such as analysing the effect of lagged, significant changes in foreign ownership on the level of corporate governance. We indeed found that foreign institutional investors have enhanced the development of corporate governance mechanisms in Chinese publicly listed firms. Therefore, our results indicate that further relaxations in foreign ownership restrictions will hasten the development of the Chinese capital markets.