Foreign investor participation and stock market liquidity - Evidence from non-financial listed firms in Vietnam

Abstract

Given the increasing foreign capital inflows into the Vietnamese stock market and the importance of liquidity to market development, the relationship between foreign participation and stock liquidity deserves thorough research. This paper relies on the information channel and trading channel to examine the relationship between the level of foreign holding in a firm and the liquidity of the firm’s stock in Vietnamese stock exchanges. Our data set ranges from 2008 to 2014 covering most of non-financial listed firms on Ho Chi Minh Stock Exchange and Hanoi Stock Exchange. Using econometric techniques for panel data, the results from our analysis indicate that higher foreign capital inflows are associated with lower local market liquidity. The negative effect of foreign participation on stock liquidity confirms the increase in information asymmetry caused by foreign investors as informed traders and inactive trading (e.g. long-term buy and hold strategy) of foreign investors in Vietnamese stock market. The findings are consistent with the negative relationship between foreign participation and stock liquidity in developed markets and challenge the view that foreign investors enhance the liquidity in small emerging markets. Keywords: foreign participation, liquidity, information asymmetry, adverse selection, trading activities.