Foreign investors and stock price efficiency: Thresholds, underlying channels and investor heterogeneity

• Malaysian government announced a series of liberalisation measures in the 2000s.
• The relationship between foreign shareholding and price efficiency is nonlinear.
• Information competition and adverse selection costs are the underlying channels.
• The relationship is stronger for firms with higher global visibility.
• Foreign nominees are elite processors of public information in Bursa Malaysia.

This paper examines the relationship between foreign shareholding and stock price efficiency for Malaysian public listed firms over the 2002–2009 sample period. We use stock price delay as an inverse measure of price efficiency, and consider the speed of adjustment to local and global common factor information. The results show that foreign investors accelerate the incorporation of both types of common information into the prices of Malaysian stocks, mainly due to their superior skills in processing systematic market-wide factors. However, we find evidence of optimality in foreign shareholding, suggesting that the efficiency benefit disappears after foreign ownership exceeds a certain threshold level. Further analyses shed lights on the channels and moderating variables driving this non-monotonic relationship. Our disaggregate analysis on foreign investor heterogeneity shows that foreign investors who trade through nominee accounts are elite processors of public market-wide and firm-specific news in the Malaysian stock market.