B1031115_论文终稿.doc

Cross-Border Equity Investment and Market Integration: Practice of Chinese Stock MarketRui OuyangResearch CenterShanghai Stock ExchangeShanghai, P.R.ChinaE-mail : Lei ChenResearch CenterShanghai Stock ExchangeShanghai, P.R.ChinaE-mail : AbstractThis paper examines the impact of cross-border equity investment on stock market integration based on samples of Chinese listed companies from 1998 to 2008. The empirical results show that foreign shareholdings significantly improve the market integration level of Chinese stock market with global market. Specifically, institutional shareholders considerably enhance the market integration level, whilst individual foreign shareholders have non-significant influence. Among the foreign institutional investors, the investors holding B shares and H shares have a positive effect on the market integration, while qualified foreign institutional investor has little influence. Both financial and non-financial foreign institutional shareholders have similar influence over the market integration.Keywords-foreign shareholders; market integration; Chinese stock marketI. IntroductionThe progress of international work division system upgrades the integration level of global economics. As a consequence, the integration of capital market has attracted lots of attention by academic researchers. Especially, since many developing countries opened their capital market in 1990s and enabled foreign investors access to the domestic stock market 1, it has became a focus of the Development Economics whether this opening improves their market integration with world market.The enhancement of market integration has a marked impact on developing countries macroeconomic development and financial revolution 23, including easier and cheaper accesses to external finance 4, resources allocation efficiency, financing costs, the ability of domestic investors to diversify risk, stock price volatility, global capital flow as well as the domestic transfer of business focus 567. However, market opening is not equivalent to market integration 1. Only under the following two conditions, the deregulation of capital flowing would enhance the level of market integration 8. Firstly, foreign investors believe relevant financial policies will hold consistently and stably in the long term. Secondly, local government establishes a complete policy set to support domestic stock market.This project was supported by China Postdoctoral Science Foundation (2011M500526).In the previous research works, it is reported that the opening of capital market will improve the market integration to some extent due to the following three reasons. Firstly, the growth of foreign trade and the expansion of foreign direct investment strengthens the correlation of individual countrys macroeconomic fluctuation factors 9. Secondly, regional monetary system revolution increases the connection of each countrys monetary policy 10. Thirdly, the deregulation of capital flowing, which is adopted by countries during the capital market revolution, enables market risk factors spread fast across countries 11. Among the aforementioned reasons, the capital flowing and multinational flowing of equity capital is the most important one 11. Focused on New Zealand stock market, it is found that, as the domestic stock markets opened to the foreign investors, the increasing size of foreign shareholdings substantially improves the integration level of local market with global market 11.Although lots of research works focus on the impact of opening process of emerging markets on the market integration, little study has been done with respect to Chinese stock market. As one of the largest emerging markets, Chinese stock market has developed tremendously since 1990s. With the economic opening, Chinese stock market moves from a separately local market to an international market. The degree of opening has dramatically increased due to continuous policy reforming. The foreign shareholders have been attracted into Chinese stock market through the establishment of B-share and H-share market in 1990s. The main Chinese market (A-share market) opening process has been marked by introducing qualified foreign institutional investors (QFIIs) in 2004. In addition, the foundation and regulation of the capital in China have changed dramatically in recent years, for instance, reforming free convertibility of RMB, and relaxing controls on capital flows. Therefore, it is desirable to investigate the influence of foreign investors over the integration level of Chinese stock market with global market.This study will investigate the impact of the foreign shareholdings on the market integration of Chinese stock market based on a sample of eleven years detailed ownership structure of listed companies on the two Chinese domestic stock exchanges, namely, the Shanghai and the Shenzhen stock exchange. Our empirical result shows that the opening of Chinese stock market significantly improve the integration level of Chinese stock market with world market.II. Research Design and DataTo examine the relationship between foreign institutional ownership and firm-level stock return volatility, a fixed-effect regression is applied on panel data: (1) Where, the dependent variable stands for the market integration; is the proportion of shareholding of different type foreign shareholders; denotes a set of firm-level control variables; represents industry and year fixed effects.A. Measure of Market IntegrationSince it is proved that one of the stock market integration outcomes is the synchronization of stock return 48912, the market integration based on the return variation will be measured in this study. If foreign shareholdings would improve the integration of Chinese stock market with international market, it is expected to observe that more international information should be reflected by stock prices of Chinese listed companies. Thus, two simple capital asset pricing models (CAPM) are constructed as follows: (2) (3)Where, denotes the daily return of single stock (considering redistribution of cash dividends); is the daily return of domestic index return (after dividend adjusted); stands for the daily return of world index return. In this study, the adjusted Shanghai Composite Index is adopted to present the domestic index, and the MSCI This study chooses the MSCI World Index to present the world index. This index is defined by Morgan Stanley Co., including 28 developed country markets, and is an index that professional investment decisions and academic research often use to reflect the situation of world stock market. world index serves as the world index.The equation (2) is estimated by using mixed ordinary least square (OLS) regression. The estimated denotes the synchronization of single stock price with domestic market, whilst () represents the stock price segment which is not contributed by the domestic market. In equation (3), the return of world market index is involved explicitly. By using mixed OLS regression, the estimated reflects both factors of domestic and international markets. Therefore, (- ) represents the influence of world market information to Chinese stock market. Consequently, the natural logarithmic ratio of two variables could roughly measure the level of market integration () as shown in the equation (4): (4)B. Data and Construction of Control VariablesDataThe raw data is obtained from Database of CSMAR. The top ten shareholders of every Chinese listed company from 1998 to 2008 are collected manually in such a way that their industry, holding nature and country origin are identified by searching their homepage website. Government entities of domestic legality shareholders are identified by referring to the ultimate controller.Daily stock price are sourced from the stock transaction database of CSMAR. MSCI index information is obtained from Sohu Finance Database (). Further, all the financial institutions, the companies which have been delisted or suspended to trade, and the companies whose data are unavailable at the sample time are removed. Finally, the unbalanced panel data including 1253 Chinese listed companies over a period of eleven years are constructed.Control variablesFollowing the research work in 13, this study constructs a reasonable framework of ownership structure to investigate the effect of foreign shareholding on the market integration of Chinese stock market with global market. The definition and calculation of variables are shown in Table 1.TABLE I. Definition of variablesVariablesExpected SignVariable DefinitionCalculationFOREIGN+Large foreign OwnershipTotal holdings by foreign investors/Number of sharesFOREIGNINSTUncertainForeign Institutional InvestorsHoldings by foreign institutional investors/Number of sharesFOREIGNPER+Foreign Individual InvestorsHoldings by foreign individual investors/Number of sharesDOMSTATE+GovernmentHoldings by government/Number of sharesDOMPER+Domestic individual investorsHoldings by domestic individual investors/Number of sharesDOMINST+Domestic institutional investorsHoldings by domestic institutional investors/Number of sharesSIZE+Company sizeThe natural logarithm of the stock market value at the end of fiscal yearTURNOVER+TurnoverThe annual average daily stock turnover rateLEVERAGE+LeverageLong-term liability at the end of fiscal year/EquityIII. Empirical resultsA. Foreign Shareholding and Market IntegrationTable 2 presents the regression results of the relationship between the foreign ownership and the market integration. For Model (1) in Table 2, the regression coefficient of aggregate foreign ownership (FOREIGN) is positively significant at the 1% level. It indicates that a higher percentage of foreign shareholding contributes to a higher level of market integration. Therefore, foreign shareholdings strengthen the connection between Chinese and global stock markets. In Model (2), the foreign ownership is further subdivided into foreign institutional ownership (FOREIGNISNT) and foreign individual ownership (FOREIGNPER). It is shown that only the regression coefficient of FOREIGNINST is significantly positive at the 1% level, whilst the coefficient of FOREIGNPER is not significant. It suggests that the shareholdings of foreign institutional investors have a greater effect on the market integration than foreign individual investors. In other words, the positive impact on the market integration is mainly contributed by foreign institutional investors rather than foreign individual investors. The foreign institutional investors play a dominant position in Chinese stock market compared with foreign individual investors. As mentioned before, Chinese government has opened main stock market to QFIIs. Considering the different regulation and market environment, the QFIIs may have some different impact compared with the other foreign institutional investors who hold the B-share and H-share. To highlight this difference, the foreign institutional ownership in Model (3) is separated to QFII, including the qualified foreign institutional investors up to Oct. 2009, issued by State Administration of Foreign Exchange, and FOREIGNLEGALTY, including other foreign institutions. The result shows that the regression coefficient of FOREIGNLEGALTY is positively significant at the 5% level, which confirms the result in Model (2). However, the regression coefficient of QFII is not significant, which indicates that the QFIIs do not influence the market integration significantly. Therefore, the positive impact on the market integration from foreign institutional investors is primarily from B-share and H-share holders, but may be not mainly from the QFIIs.In Model (4), the foreign institutional ownership is divided into two groups from the perspective of financial institutions: financial institutions (FOREIGNFINANCE), including banks, security companies, funds and investment companies, and non-financial institutions (FOREIGNNONFINANCE), including all other foreign institutions. It is shown that both the regression coefficients of FOREIGNFINANCE and FOREIGNNONFINANCE are not significant, which indicates that the foreign institutional investors have little impact on the nature of the corporation. Furthermore, it is noticed that both the regression coefficients of DOMSTATE and DOMINST are positive and significant across Model (1)-(3). Such an observation indicates that more stock held by government and domestic institutions will improve the market integration. However, the regression coefficient of DOMPER is not significant, which indicates that the domestic individual shareholdings have little impact on the level of market integration. In Model (4), the domestic institutional ownership is further subdivided into two categories: financial and non-financial institutions. It is shown that the regression coefficient of DOMFINANCE is positively significant, whilst the regression coefficient of DOMNONFINANCE is not significant. It means that the positive impact of domestic institutions on the market integration is primarily contributed by financial institutions rather than non-financial institutions. In addition, the regression coefficient of TURNOVER is positively significant at the 1% level across Model (1)-(4). It suggests that larger the turnover, more world market information the stock price reflects, and higher the market integration level is. The regression coefficient of AGE is negatively significant at the 1% level. It indicates that younger the company, more world market information the stock price reflects. The regression coefficients of LEVERAGE and BTM are not significant.TABLE II. The Relationship between Foreign Shareholding and Market IntegrationDependent variable is INTE(1)(2)(3)(4)FOREIGN0.019*(1.671)FOREIGNINST0.019*(1.677)FOREIGNPER0.1190.1190.102(0.738)(0.738)(0.633)QFII0.018(0.332)FOREIGNLEGALTY0.019*(1.621)FOREIGNFINANCE0.032(0.785)FORGIGNNONFINANCE0.004(0.344)DOMSTATE0.022*0.022*0.022*0.015*(3.127)(3.134)(3.123)(2.300)DOMINST0.024*0.024*0.024*(3.240)(3.247)(3.239)DOMPER0.0180.0180.0180.009(1.361)(1.371)(1.371)(0.730)DOMFINANCE0.017*(2.432)DOMNONFINANCE-0.186(-0.368)TURNOVER0.004*0.004*0.004*0.003*(9.277)(9.276)(9.275)(8.989)BTM0.1620.1630.1630.061(0.621)(0.628)(0.627)(0.238)AGE-0.140*-0.140*-0.140*-0.140*(-5.645)(-5.634)(-5.627)(-5.486)LEVERAGE0.0010.0010.0010.001(0.072)(0.071)(0.071)(0.102)Adjusted R20.0170.0170.0180.018NO. of obs9349934993499349All regressions include (but do not report) industry and year fixed effects. Huber-White robust standard errors based T-tests are reported in parentheses.*, * and * denote significance at the 1%, 5% and 10% levels, respectively.B. Sample Selection BiasAs the empirical result could be affected by any sample selection bias, a sensitivity problem may exist within the empirical tests in this study. In order to identify the existence of the sensitivity problem, two robustness tests are conducted. In the first regression test, the data, which has been excluded from the test sample at the data processing step, is added back, and the same regression in Model (1) is performed. In the second regression test, since foreign investors hold no ownership in lots of companies during sample years, a zero dummy variable (FORDUMMY), whose value is 1 if aggregate foreign ownership is not zero and 0 otherwise, is introduced. The empirical results of the two robustness tests are presented in Table 3. As shown in Table 3, the regression coefficient of foreign ownership remains significantly positive in the first regression test. It indicates that foreign shareholding still exhibits significantly positive impact on the market integration of Chinese stock market after admitting the possible sample selection bias. Such an observation further confirms the results in Table 2. Besides, the signs of the other control variables are in line with the results in Table 2. In the second regression test, the regression coefficient of FORDUMMY is not significant. It means that the null foreign ownership samples have no impact on the robustness of the empirical result. Such a finding verifies the aforementioned results in Table 2.TABLE III. The Effect of Sample SelectionDependent variable is INTE(1)(2)FOREIGN0.019*0.016*(1.671)(1.292)DOMSTATE0.022*0.022*(3.127)(3.125)DOMINST0.024*0.024*(3.240)(3.237)DOMPER0.0180.018(1.361)(1.364)TURNOVER0.004*0.004*(9.277)(9.287)BTM0.1620.162(0.621)(0.624)AGE-0.140*-0.141*(-5.645)(-5.659)LEVERAGE0.0010.001(0.072)(0.058)FORDUMMY0.089(0.188)Adjusted R20.0210.017NO. of obs93499439All regressions include (but do not report) industry and year fixed effects. Huber-White robust standard errors based T-tests are reported in parentheses.*, * and * denote significance at the 1%, 5% and 10% levels, respectively.IV. ConclusionIt is an important issue in the Development Economics whether the opening of developing stock markets improves the level of market integration or not. This paper examines the relationship between foreign shareholding and