Information asymmetry, policy shocks, and international equity investment: Evidence from the anti-corruption campaign in China

Information plays a critical role in financial transactions and markets, especially in international investment where foreign investors are at an informational disadvantage relative to domestic investors. Prior studies show a positive reaction of the Chinese capital market to China's anti-corruption campaign, which is also consistent with improved performance of Chinese listed firms following the campaign. We document a contrasting reaction of less-informed foreign investors. Exploiting staggered anti-corruption investigations across provinces as plausibly exogenous shocks, we find that foreign institutional investors increase their equity investments in Chinese listed firms headquartered in affected provinces following the anti-corruption campaign; foreign individual investors, by contrast, reduce their equity investments after the campaign, which is driven by those with non-Chinese ethnicity. Further analyses show that the increased equity investments of foreign investors stem primarily from those residing in jurisdictions sharing a similar cultural tradition with China. Our study has significant implications for foreign investors in the context of the increasingly intense relationship between China and the West.