Foreign Investment And Heterogeneous Beliefs Of Investors

As the rapid growth of China’s economic and the deepening openness, foreignholding shares of Chinese listing corporation has become more and more popular.Although China’s stock market is still limited openness, foreign capital has resulted ina substantial impact on the stock market’s risk. The investors’ heterogeneous beliefsare the important sources of Chinese stock markets’ risk. Consequently, as the foreigncapital flows into Chinese stock market, out of concerns for risks, the foreignshareholders would inevitably pay close attention to the difference in opinion amongthe Chinese investors of the market, namely the heterogeneous beliefs.For the first time, the thesis analyzes in detail how the big foreign shareholdersdeal with the heterogeneous beliefs while they hold the shares of Chinese listedcompanies. Through decomposing investors’ heterogeneous beliefs into SUV and PINand analyzing the data about A shares of Chinese listed companies from2006to2011,we have confirmed that out of the motive of short-term arbitrage, the foreignshareholders had taken measures on the heterogeneous beliefs. On the one hand, whenthe foreign capital flows into Chinese stock market, the foreign shareholders wouldchoose those stocks with low SUV and comparatively high degree of informationasymmetry so that they could manage the risk of the stocks’ violent fluctuationsmeanwhile save themselves enough arbitrage space; on the other hand, after theinflow of foreign capital, the proportion of informed trading would increase whichwould promote the information asymmetry of the market. At the same time, theinflow of foreign capital makes no contribution to the investors’ SUV level. Theevidences above prove that the inflow of foreign capital would not improve thecorporate governance level but aggravate the risk of Chinese stock market.