Foreign Shareholding and Stock Price Efficiency: Firm-Level Evidence from Malaysia

Abstract

This paper examines the relationship between foreign shareholding and stock price efficiency for Malaysian public listed firms over the 2002-2008 sample period. We use stock price delay as an inverse measure of informational efficiency, and consider the speed of adjustment to local and global common factor information. The results show that foreign investors accelerate the incorporation of both types of common information into the prices of Malaysian stocks, mainly due to their superior skills in processing systematic market-wide factors. However, we find evidence of optimality in foreign shareholding, suggesting that the efficiency benefit disappears after foreign ownership exceeds a certain threshold level. Further analyses uncover the underlying channels that give rise to the U-shaped curve, and identify the significant moderating variables that strengthen this relationship. Our disaggregate analysis on foreign investor heterogeneity shows that foreign investors who trade via nominee accounts are elite processors of public market-wide and firm-specific news in the Malaysian stock market.