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Purpose – Examine the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both in the domestic and foreign markets, and their importance in promoting good corporate governance practices worldwide and facilitating increased financial integration.

Methodology/approach – Review and synthesize recent academic literature (1970–2011) on the process of international financial integration and the role of foreign institutional investors in the increasingly global financial markets.

Findings – Despite the concern that short-term flow of international capital can be destructive to the emerging and developing market economies, academic evidence on a destabilizing effect of foreign investment activity is limited. Institutional investors’ systematic preference for stocks of large, well-known, globally visible foreign firms can explain the presence of a home bias in international portfolio investment.

Research limitations – Given the breadth of the two literature streams, only representative studies (over 45 published works) are summarized.

Social implications – Regulators of emerging markets should first improve domestic institutions, governance, and macroeconomic fundamentals, and then deregulate domestic financial and capital markets to avoid economic and financial crises in the initial stages of liberalization reforms.

Originality/value of paper – A useful source of information for graduate students, academics, and practitioners on the importance of foreign institutional investors.

This study focuses on listed and over-the-counter (OTC) companies in the Taiwan Stock Exchange. It found that an increase in the ownership proportion of institutional investors (INs), including foreign investors, investment trusts, and dealers can enhance the informativeness of stock prices. The relationship between these factors follows an inverted U-shaped pattern, indicating that excessively high ownership ratios can actually lead to a decrease in the informativeness of stock prices. Additionally, increasing the ownership proportions of foreign investors and investment trusts can reduce the risk of stock price collapse, while dealers show no significant relationship in this regard. This study also reveals that the technical variable of the price deviation rate is an important explanatory factor for post-collapse returns. It is positively correlated with the magnitude of the price decline after a collapse, meaning that stocks with weaker pre-collapse performance experience larger post-collapse declines. When the data during the 2020 pandemic period are excluded, changes in foreign ownership ratios show a significant positive correlation with postcrash returns in both the long and short term. The significant correlation in the short term may be due to a high proportion of foreign ownership. Any reduction in this could put pressure on stock prices, and retail investors may follow suit and sell-off, using foreign investors as a reference. The significant correlation in the long term might be due to foreign investors themselves possibly also trying to avoid the pressure that their own short-term sell-offs could exert on stock prices. The changes in the ownership ratios of investment trusts and dealers indicate that medium and long-term changes have a significant impact on postcrash returns, while the changes in the major players' ownership show no significant correlation. When data from 2020 are included in the analysis, the significance of all INs decreases.

Institutional investors have increasingly gained importance since the early 1990s. The assets under management in these funds have increased threefold since 1990 to reach more than US$45 trillion in 2005, including over US$20 trillion in equity (Ferreira & Matos, 2008). Further, the value of institutional investors' assets represents roughly 162.6% of the OECD gross domestic product in 2005 (Gonnard, Kim, & Ynesta, 2008). Given the magnitude of institutional investors' holdings relative to the world market capitalization, challenging questions on the economic role of these investors have been raised. One such question concerns their impact on the stability of stock markets. On the one hand, active strategies of buying and selling shares by these investors may contribute to moving stock prices away from their fundamental values. On the other hand, if all institutional investors react to the same information in a timely manner, they are in fact helping to increase market efficiency by speeding up the adjustment of prices to new fundamentals (for competing theories on the role of institutional investors, see, e.g., Lakonishok, Shleifer, & Vishny, 1992). This view of institutional investors as “efficiency drivers” generated considerable debate for many years (see, e.g., Ferreira & Laux, 2007; French & Roll, 1986).

Purpose – Study the firm-level and country-level determinants of US institutional investors' holdings in American Depositary Receipts (ADRs) from emerging markets.

Methodology/approach – We use a sample of 112 firms from emerging markets that listed as ADRs between 1990 and 2005. Rather than adopting the issuer's perspective, we take in this study the point of view of the investor and we focus on the US institutional investors' participation in ADR firms.

Findings – We find that institutional investors hold higher stakes in foreign firms that are listed on more restrictive exchanges, in large, privatized, more liquid, and more transparent firms. Mutual investors and other institutional investors also prefer firms from countries with weaker institutional environments and from civil law legal tradition. Controlling for country-level determinants increases significantly the explanatory power of the model.

Social implications – Our results have important implications for firms from emerging markets seeking to attract foreign institutional investors.

Originality/value of the chapter – We focus on the motivations of investors when they choose to invest in the ADR, rather than on the ADR issuer motivation. In addition, we consider all types of institutional investors that acquire a participation in an ADR firm.

Purpose – We study the investment behavior of foreign institutional investors operating in China. A detailed analysis of foreign institutional investors is examined, along with a comparison of domestic Chinese investors.

Methodology/approach – We adopt annual Chinese stock market data for the period 2003–2009 for both foreign and domestic funds to analyze the industrial preference of foreign funds and compare the different preferences between foreign funds and domestic Chinese funds in relation to financial characteristic and corporate governance indicators.

Findings – The analysis reveals that foreign funds have a preference for a range of sectors such as transportation, metals and nonmetals, and machinery, as opposed to industries with a requirement for local knowledge. The portfolios of domestic Chinese funds are distributed more evenly across sectors, compared to foreign funds. The comparative analysis reveals that the companies foreign funds invest in are significantly different from those firms favored by domestic funds in terms of size, profit, and management compensation.

Social implications – These empirical findings highlight the differences between foreign and domestic funds investment preferences and has implications for policy makers aiming to attract foreign investors to emerging markets.

Originality/value of chapter – Our chapter not only provides an introduction on the QFII scheme in China, but also examines the impact of a comprehensive range of firm-level characteristics, financial and corporate governance indicators, on the investment decisions of foreign and domestic funds in emerging markets.

We find a significant curvilinear relation between Japanese firm value and the percentage of equity held by foreign investors. Firm value rises until foreign ownership reaches approximately 40%, and then it begins to decline. It appears that large foreign institutional investors invest in well-performing firms and serve as effective monitors. Our results remain robust even after controlling for other corporate governance variables, such as equity ownership by main banks and board membership by foreign investors. It seems that most of the increase in firm value and the performance improvement are due to rising levels of equity ownership in non-keiretsu (independent) firms by foreign investors. We also show that an increase in foreign ownership is correlated with a rise in R&D expenditures, suggesting that foreign institutional investors contribute to the long-term viability and competitiveness of Japanese firms.

Purpose – The aggregate investment by foreign institutional investors (FIIs) in the Indian stock market is significant compared to that by domestic institutions and individual (retail) investors. The question of whether FIIs exhibit herding and positive feedback trading while investing in the Indian stock markets has not been examined so far. This study is an attempt to fill the gap and contribute to the existing evidence on foreign portfolio investment in India.

Methodology/approach – We have analyzed the daily data on purchases and sales of securities by FIIs sourced from the Securities and Exchange Board of India (SEBI), and the Bombay Stock Exchange (BSE). We have adopted the approach of Lakonishok et al. (1992), and Wermers (1999) to examine herding and positive feedback trading by foreign investors.

Findings – Our results suggest that FIIs exhibit herding and positive feedback trading during different phases of the stock market. This observed behavior is prominent in but not restricted to large cap stocks as they enjoy better liquidity.

Social implication – The herding and positive feedback trading by FIIs is a cause for concern for government of India, capital market regulator (SEBI), and the country's central bank (RBI) as it adversely affects stock prices and volatility. They are required to formulate and implement a suitable policy response given their objective of protecting the interests of small investors in the market. They may also have to monitor the purchases and sales of equities by FIIs in general and of better performing large cap stocks in particular.

Liability of foreignness (LOF) has been one of the central constructs in the field of international business and management. Over the past two decades, a significant body of theoretical and empirical research has accumulated, theorizing on the sources of these LOFs, investigating their magnitude, and prescribing approaches to mitigate these disadvantages. However, much of this research is almost exclusively related to firms expanding their products, services, and operations to other countries as part of their global expansion. The difficulties firms face in foreign product markets is just one dimension of the costs they can face in their attempts to secure resources abroad.

We expand the domain of the LOF construct to include liabilities faced by firms accessing foreign capital markets in light of the increasing integration of capital markets. We identify four sources of LOF in capital markets: regulatory costs, information costs, unfamiliarity costs, and costs arising out of cultural differences. Based on an extensive review of “home bias” in equity markets, we propose four strategies to erase the legitimacy deficits that firms encounter in foreign capital markets: bonding, signaling, adoption of business practices isomorphic with the host country, and certifications and endorsements by third parties. We also offer suggestions for operationalizing and measuring LOF in capital markets as well as several directions for advancing further research on LOF in the context of capital markets.

This research seeks to understand how shareholder constituencies including controlling family, nonfamily insiders, as well as domestic and foreign institutions in the corporate governance system of emerging economy firms perceive institutional risks in terms of regulative, normative, and cognitive institutions and influence strategic choices in the internationalization of their invested firms.

The sample data are Taiwanese publicly listed companies in the electronics and computer industry. Panel data of the parent firms and their overseas affiliates are available from the annual report and Taiwan Economic Journal database. Country-level data are available from the World Investment Report and the IMD World Competitiveness Report. Statistical regression models including tobit and logistic regression are used to analyze the data.

Controlling family and nonfamily insider shareholders tend to influence their invested firms to enter in institutionally smaller host countries through a shared ownership. Domestic institutional shareholders tend to influence their invested firms to adopt a shared ownership and enter in host countries with larger and smaller institutional distances in terms of regulative and normative institution, respectively. Foreign institutional shareholders tend to influence their invested firms to enter in institutionally smaller host countries through a whole ownership.

The strategic choices of foreign market entry made by emerging economy firms are significantly shaped by the different risk perceptions of shareholder constituencies in their corporate governance system toward the institutional distances between the home and the host country.

This research examines stock traders' disposition effects and contrarian/momentum behavior in the Taiwan Stock Exchange (TWSE). Specifically, we first investigate disposition effects across all trader types and then examine the relationships between disposition effects, trader types, and order characteristics. Next, we explore contrarian and/or momentum behavior and analyze the relationships among the contrarian/momentum behavior, investor type, and order characteristics. Finally, the links among trader types, order characteristics, and investment performance are detected. This chapter yields the following findings. (1) Individual investors exhibit the strongest disposition effects compared to other investors. (2) Foreign investors, investment trusts, and individual investors tend to use large orders to sell loser stocks. (3) Investment trusts are inclined to be momentum traders, while individual investors tend to perform contrarian strategies. (4) Institutional aggressive and large orders perform better than individuals' orders. (5) The performance of foreign investors' selling decisions is better than that of retail investors.