Study On The Effect Of Foreign Shareholders On China’s Stock Market Volatility

The phenomenon of foreing investor including QFII holding the equity of thelisting Corporation has been to a attracting scenery on chineae stock market. Theintroducing of foreign investors has been regarded as an important measure toimprove the level of protection of minority shareholders and reduce the risk of listingcompany by the authorities. Although the opening degree of Chinese Stock market islimted, foreign investors have entered into the market and hold different amount ofshares through various channels. Therefore, the effect of foreign sharehoders onvolatility of the stock market of China has actually occurred.This dissertation analyses how foreign sharehoders to affect the stock marketvolatility of China through two ways indirectly. The first way is the market path. Themarket transaction process of of foreign sharehoders will change the informationefficiency of the stock market, will indirectly affect the stock market volatility.Markettransactions of foreign sharehoders include the trade in the secondary market andmerger and acquisition behavior.Second ways is thecorporate governance path. Whenforeign sharehoders hold a certain amount of the shares of the listing Corporation,they may participate in the corporate governance, then improve the value of thecompany and affect the stock market volatility in the end. Firstly, this paper elaborateupon the effect of foreign trade and governance behavior of foreign shareholders onthe stock price volatility in terms of theory. Secondly, this paper gives empiricalanalysis of two ways of foreign shareholders influence stock market volatility,usingthe data collected manually by the research group. It reachs the following conclusions:first, only net buying behavior of direct foreign shareholder would reduce stockvolatility, howerver net selling behavior of foreign shareholder would increase thestock volatility; listing Corporation sample which net buying behavior of directforeign shareholder canl reduce stock volatility take on large listing Corporation or atthe same time in the domestic and foreign listing. Second, net buying behavior ofdirect foreign shareholder affect the stock volatility is due to the change ofinformation efficiency on transmitting of foreign shareholder; Direct foreignshareholder increases the market information transmission efficiency in the sample oflarge listing Corporation or at the same time in the domestic and foreign listing. Thebehavior of direct foreign shareholder does not affect the market informationtransmission efficiency. Third, the way of the agreement to transfer will lead todecrease risk of betas, but it increses stock market volatility. Foreign mergers andacquisitions through the indirect acquisition and additional directional manner doesnot significantly affect the stock market volatility. Fourth, the foreign mergers and acquisitions whose aim is to control the company do significantly increase the stockmarket volatility, and The foreign mergers and acquisitions whose aim is not tocontrol the company do not significantly affect the stock market volatility, from theangle of aim of oreign mergers and acquisitions.Fifth, price volatility will be toincrease if the behavior of foreign shareholders lead to the reduce of the company’smarket value. No matter whether foreign shareholders to reduce the market value ofthe company, the effect of the foreign shareholder on the stock price fluctuationdepends on the function of the expected value and the expected volatility of assetreturns which the market estimates, the degree of risk aversion of the foreignshareholder and the cost of governance which the market estimates. Sixth, in a certainrange of direct ownership, the foreign shareholders can effectively reduce thecompany’s stock price fluctuations, but the effect of corporate governance would bedisappeared if direct ownership is too low or too high. Indirect shareholding does notaffect stock price volatility of the company.Therefore, the stock market the China should adhere to path open to foreigninvestors, and adhere to the introduction of high quality QFII. The number of directforeig shareholder, especially the major foreig shareholder, is less, so we shouldwork on the introduction of foreign shareholders. We improve the quality ofinformation disclosure of the company, and we guide the investors to carry on thevalue investment. We should improve China’s stock market environment, the aim tohelp foreign investors to play to the role of information processing and valueinvestment. On the process of introducing foreign sharehoders, we should take a bigpace, but also to strengthen the monitoring of foreign sharehoders. We should attackand prevent the speculation of short-term speculative, price manipulation and insidertrading.