Foreign Equity Ownership and Information Asymmetry: Evidence from

Japan

Li Jiang
Hong Kong Polytechnic University

Jeong-Bon Bon Kim V

City University of Hong Kong

Journal of International Financial Management & Accounting, Vol. 15, No. 3, pp. 185-211, October 2004
Abstract:
Using a large sample of Japanese firms, we investigate whether the level of foreign ownership in a firm is
inversely related to information asymmetry between firm (managers) and market (outside investors).
Since information asymmetry is not directly observable and, thus, is difficult to measure empirically, our
analysis focuses on the link between foreign shareholding and a measurable consequence of information
asymmetry; that is, the timing and magnitude of intertemporal return-earnings associations. The
empirical results support our hypothesis, and subsequent tests based on residual foreign ownership show
that the relation between foreign ownership and information asymmetry is robust to the addition of
various control variables such as market capitalization and cross-corporate holdings. We also show that
foreign investors tend to avoid stocks with high cross-corporate holdings. Overall, our results suggest that
foreign (institutional) investors are likely to be efficient processors of public information and are attracted
to Japanese firms with low information asymmetry.
Number of Pages in PDF File: 27