This paper investigates the relationship between foreign institutional ownership and value relevance in Taiwan stock market from 1994-2007. In periods when Taiwan stock market experienced high volatility, financial statements lost more of its relevance;
however, different causes of market volatility can lead to different perception of
financial statement’s reliability. Since the deregulation of investment ceilings for foreign investors in 2001, followed by Taiwan’s participation in WTO in 2002, the trend of the combining explanatory power of earning and equity book values become much steadier than before. Trend regression also shows a significant positive slope coefficient,
indicating that the overall tendency of value relevance is increasing.
Empirical results further document a positive association between foreign
ownership and value relevance. With the increase in FI holdings, earnings (book values) are weighted more for profit (loss) firms, consistent with the findings documented by Dhaliwal et al. (2005). Furthermore, this paper finds that foreign institutions in Taiwan are perceived by the market not only as short-term oriented speculators but also an indicator of a firm’s current and future operating prospects.
Some constraints of this study are as follows. First, the point of time every company releases its share structure is inconsistent, this poses some difficulties in choosing a proper stock price as dependent variable. Second, the problem of “fake
foreign capital” should be a concern. Foreign capital is investment capital remitted from foreign countries. Domestic capital after layers of management can become “foreign capital” which is hard to detect by regulators. Fake foreign capital can blur the real level of foreign institutional holdings and mislead the conclusions made from market
valuation models. Third, according to Lin et al. (2008), panel data regression yields better regression results than general regression. Since yearly data is used in this study, the adoption of panel data will cause too small sample size. The use of panel data for a longer period might be available for future researches.
Some studies have indicated that earnings-book value-price model neglects another important component Ohlson specified in his model—non-financial information (Lo and Lys, [2000]; Peng, [2001]). Foreign institutional ownership is actually one of non-financial information that has influence on the use of financial numbers. As Dontoh et al. (2004) propose, non-information-based trading is one of the major contributors to change of value relevance. Therefore, more non-financial information that has an impact in stock valuation is worth investigating. Besides, how and to what extent
foreign institutional investors play governance roles in their investees also worth further investigation. In view of the gradual deregulation of economic restrictions between Taiwan and Mainland China, “foreign capital” will become no less important than now, which paves the way for continuing studies on this topic.
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