Do Foreign Investors Promote Stock Price Efficiency in Emerging Markets?

• Date: 01 March 2019
• DOI: http://doi.org/10.1111/irfi.12164
• Published date: 01 March 2019

Do Foreign Investors Promote Stock

Price Efficiency in Emerging

Markets?*

XUAN VINH VO

†‡

†

University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam and

‡

CFVG Ho Chi Minh City, Ho Chi Minh City, Vietnam

ABSTRACT

This paper examines the role of foreign investors in promoting stock price

efficiency in emerging stock markets relying on the fact that stock prices in

these markets are influenced by both local and global factors. We employ a

data sample of Vietnamese-listed firms on the Ho Chi Minh City stock

exchange over the period from 2006 to 2015. We utilize the panel data esti-

mation analysis. The results show that foreign investors accelerate the incor-

poration of available information into local stock prices. The finding

reinforces the important role of foreign investors in domestic stock markets

of emerging economies.

JEL Codes: G14; G15; G38

Accepted: 16 October 2017

I. INTRODUCTION

It is commonly agreed that foreign investors play a critical role in emerging

markets due to their sophisticated investment skills, huge resources, and large

holdings in firms. Firm-level foreign shareholding is considered as an important

proxy for financial liberalization. This measures the actual presence of foreign

investors across firms in a country over time (Lim et al. 2016). Further, foreign

investors are acting as important channel to facilitate the transmission of avail-

able information, especially global information, into stock prices across emerg-

ing stock markets. This important mission results in improved informational

efficiency of prices in domestic equity markets (Bae et al. 2012).

In this paper, we investigate whether foreign investors improve stock price

efficiency in emerging markets. Similar to the previous literature, stock price

* The authors thank Thi Tuan Anh Tran and Huynh Anh Duong for excellent research assistance.

Any remaining errors are our own responsibility. This research is funded by the Vietnam National

Foundation for Science and Technology Development (NAFOSTED) under grant number 502.99-

2015.27. They also acknowledge the financial support of the University of Economics Ho Chi Minh

City. They also thank Huynh Anh Duong and Thi Tuan Anh Tran for excellent research assistance.

© 2017 International Review of Finance Ltd. 2017

International Review of Finance, 19:1, 2019: pp. 223–235

DOI: 10.1111/irfi.12164