Foreign Ownership and Information Asymmetry

Foreign ownership has two competing effects on information asymmetry. Short term investment horizon, superior information processing capability, controlling positions, and increased agency costs associated with foreign ownership increases information asymmetry, while demand for more disclosure, better accounting and auditing standards, use of international auditors, incentive alignments, long term investment horizon and greater monitoring decreases information asymmetry. In this article, we examine and find a significant and positive impact of foreign ownership on information asymmetry measured by bid-ask spread in China. On balance, foreign equity investors tend to enhance their informational advantages more than improving the general informational environments in local markets. These results have implications for transparency and disclosure policies as well as privatization in emerging markets.