Journal of Financial and Quantitative Analysis

Research Articles

Large Foreign Ownership and Firm-Level Stock Return Volatility in Emerging Markets

Donghui Lia1, Quang N. Nguyena2, Peter K. Phama3 and Steven X. Weia4

a1 University of New South Wales, School of Banking and Finance, Sydney, NSW 2052, Australia, [email protected]

a2 Khang Thong Group, 67 Nguyen Thi Minh Khai Str., Ben Thanh Ward, District 1, Ho Chi Minh City, Vietnam, and Ho Chi Minh City Open University, [email protected]

a3 University of Sydney, Faculty of Economics and Business, Sydney, NSW 2006, Australia, [email protected]

a4 Hong Kong Polytechnic University, School of Accounting and Finance, Hung Hom, Kowloon, Hong Kong, [email protected]


This study constructs a firm-level measure of large foreign ownership (LFO) and investigates its impact on stock return volatility in 31 emerging markets. We find a negative relationship between LFO and volatility, even after controlling for potential endogeneity and the impact of major domestic shareholders. This suggests a stabilizing role of LFO in emerging markets, which is consistent with previous suggestions in the literature on the strong commitments and potential monitoring role of large foreign shareholders. Overall, our study highlights the importance of recognizing the heterogeneity among foreign investors and the benefits of large foreign shareholders to emerging stock markets.

(Online publication April 11 2011)


We appreciate the helpful comments from Henk Berkman, Hendrik Bessembinder (the editor), Kalok Chan (the referee), Timothy Chue, Magnus Dahlquist, Mike Firth, Xi Li, Fariborz Moshirian, Cathy Pang, Toan Pham, Yiming Qian, Shauna Shi, Neal Stoughton, Nancy Su, Wilson Tong, Alan Tucker, Jianxin Wang, Yong Wang, Chu Zhang, Hongquan Zhu, and seminar/conference participants at Beijing University, Hong Kong Baptist University, Hong Kong Polytechnic University, Southwest Jiaotong University, Tsinghua University, University of Iowa, University of New South Wales, University of Sydney, the 2006 China International Conference in Finance, and the 2006 Financial Management Association European Conference. Li, Nguyen, and Pham acknowledge financial support from the University of New South Wales Faculty Research Grant and New South Global. Wei acknowledges financial support from Hong Kong Polytechnic University Research Grant APG31.