In this paper, we investigate the characteristics of foreign ownership on the Taiwanese Stock Market, using firm data from 2001 to 2003. We find that foreign investors tend to prefer firms with certain attributes, such as large size, issuing foreign securities, high ROE, low leverage ratio, and low employee stock bonuses. They also prefer MSCI-concept and China-concept stocks.
The Taiwanese Stock Market is one of the most important emerging stock markets in the world. Table 1 shows the fractions of shares held by individual, institutional and foreign investors from 1994 to 2003. Foreign investors' transactions have increased dramatically in the past several years, and their annual trading volume has leapt from NT$265 billion in 1994 to NT$4,366 billion in 2003. Although individual investors still dominate the Taiwanese stock market, the influence of foreign investors has grown quickly.
Taiwan opened its stock market to foreign investors in 1983 by allowing domestic investment trust companies to raise overseas funds for investment in the local market. Qualified Foreign Institutional Investors (QFIIs) have been allowed to invest directly in the local stock market since 1991. Individual foreign investors were subsequently allowed to invest directly in the local market in 1996. The ceiling for total foreign investments was 10% in 1991, gradually increasing to 50% in 2000. Taiwan removed almost all limitations of foreign investment by the end of 2000 when she joined the World Trade Organization (WTO). Foreign investors may own 100% of any stock, with the exception of stock in some key industries. In 2000, the weights of Taiwan stock index in the MSCI (Morgan Stanley Capital Index) increased from 50% to 100%.' Hence, we are interested in investigating the foreign ownership in the Taiwan Stock Market after 2000.
As predicted by the International Capital Assets Pricing Model (Solnik, 1974), foreign investors would hold the market portfolio of the countries in which they invested. However, in an environment of information asymmetry, investment barriers, and disharmonious taxation, foreign investors may consider specific advantages when selecting their foreign assets instead of just the market portfolio.
Kang and Stulz (1997) were the first to investigate the home-bias puzzle using firm-specific data. They found that foreign investors in the Japanese Stock Market held disproportionately more shares of firms in manufacturing industries, large firms, and firms with good accounting performance, low unsystematic risk, and low leverage relative to the weights of the Japanese market portfolio for the period 1975-1991. Dahlquist and Robertsson (2001) revealed that foreign investors in the Sweden Stock Market for the period 1993-1997 showed a preference for large firms, firms with large cash positions, paying low dividends, and without a dominant owner. Lin and Shiu (2003) showed that foreign investors in the Taiwan Stock Market favored large firms and low book-to-market stocks for the period 1996-2000.
The fact that foreign investors do not hold shares proportional to the market portfolio is well proved in the literature. The purpose of this study is to deepen understanding of the determinants of foreign ownership by introducing further variables describing the recent situation in Taiwan.
Using firm data from 2001 to 2003, this study characterizes foreign ownership on the Taiwanese Stock Market, using firm-specific attributes under the classical multiple analysis on three-year average data and pooled cross-section/time-series data. Our results show that foreign investors tend to prefer firms with certain attributes, such as large size, issuing foreign securities, high ROE, low leverage ratio, and low employee stock bonuses. They also prefer MSCI-concept and China-concept stocks.
The paper is organized as follows. In the next section, we describe the data and the variables proxing firm characteristics. …