The Research On The Impact Of Foreign Ownership On The Return Volatility Of Chinese Stock Market

The effect of stock market liberalization is the hot issue of development economics. Although there is no consensus on how and to what extent the opening of capital market influence the development of financial system and economy, all research agree that the opening strategy has impact on the market environment, corporation governance and economy development. In line with the current researchs, this paper put forward the research on the impact of opening of stock market. To do this, the paper will focus of the return volatility, and use the foreign ownership as the proxy for opening extent, in order to reflect the dynamic feature of opening process. Based on the panel data of Chinese listed company between 1999 and 2008, we analyze the impact of entry of foreign capital on the return volatility and the mechanic through which foreign ownership influence volatility. We first focus the research on the relation between foreign ownership and firm-specific volatility and if there is difference among the impact of different foreign shareholders. Based on this result, we then forward our research about the possible mechanism through which foreign ownership influence return volatility from two dimensions. Firstly, we focus on the change of information environment, analyze the impact of foreign ownership on the idiosyncratic volatility of stock prices. Secondly, we analyze the impact of foreign ownership on the integration between Chinese stock market and world market.The paper tests the relationship between foreign ownership and return volatility, firm-specific volatility and integration with the robust panel data regression, controlling for the potential endogeneity. It is found that:(1) Foreign ownership increases the return volatility.1) There is a positive relationship between foreign ownership and return volatility controlling for firm features such as size and turnover and ownership structure. This suggests a destabilizing role of foreign shareholders in Chinese stock market;2) Among the foreign shareholders, institutional ownership has a significant positive impact on the return volatility, but the influence of personal shareholders is insignificant. This suggests the major impact of foreign ownership on the return volatility is mainly from the institutional shareholders. We also find different foreign shareholders have the same impact on the return volatility; 3) There is a linear relationship between foreign ownership and return volatility, but the relationship between state ownership and return volatility is inversed U shape;4) Corporation governance environment has no significant impact on the role of foreign ownership. Foreign ownership has the same impact in the different governance environments.(2) The mechanism through which foreign ownership influence the return volatility are firm-specific volatility and market integration.1) There is a significant positive relationship between foreign ownership and firm-specific volatility, which suggests that foreign shareholders increase the response speed of stock prices to idiosyncratic information;2) Among the foreign ownership, institutional ownership has a significant positive impact on the firm-specific volatility, but the impact of personal shareholders is negative. B/H owners increase the firm-specific volatility, but the impact of qualified foreign institutional investors (QFII) is insignificant. The indirect foreign owners have stronger impact than direct shareholder;3) There is a positive relation between foreign ownership and integration, foreign ownership improves the integration with the world market, increase the possibility of risk transmission from world market to Chinese stock market;4) Among the foreign ownership, legal entities have a significant positive impact on the integration, but the influence of personal shareholders is insignificant, which suggests that the impact of foreign ownership on the integration is mainly from the institutional ownership;5) Among the foreign legal entities, although QFII has access to the main market, but there is no significant relation between QFII ownership and integration. In contrast, foreign legal entities have a positive impact on the integration. There is no significant difference between the impact of financial and non-financial institutional shareholders also.