Article ID Journal Published Year Pages File Type
998154 Journal of Financial Stability 2016 14 Pages PDF
Abstract

•Proportion and likelihood of foreign ownership increases with the level of social trust.•The effects of social trust on foreign ownership diminishes under certain circumstances.•Foreign institutional investors from countries with a common law origin are more likely to incorporate trust-related information.

We investigate the effects of social trust on foreign institutional investors’ equity holdings in listed Chinese firms from 2005 to 2011. We find that social trust embedded in the regional environment is an important factor for the investment decisions of foreign institutional investors. We also find that the proportion and likelihood of foreign ownership increases with the level of social trust. The results support the notion that social trust and trust-related information help mitigate informational barriers in international equity investments. Our results are robust to alternative measures of social trust and a range of model specifications, including instrumental variable estimation. We document that the effects of social trust on foreign ownership diminishes in the presence of organizational learning, better formal institutional development, conservative financial reporting, and asset transparency. We also show that foreign institutional investors from countries with a common law origin are more likely to incorporate trust-related information in their investment decisions.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics, Econometrics and Finance (General)
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