The Impact of CEOs’ Social Capital on China’s Qualified Foreign Institutional Investors’ Holdings

ABSTRACT

The phenomenon of underinvestment in foreign equity securities is widely acknowledged as equity home bias. Relying on China’s sociological characteristics to explain this equity home bias, this research investigates whether CEOs’ social capital is a factor affecting the investment decisions of qualified foreign institutional investors (QFIIs). The empirical results show that CEOs’ elite university network (i.e., CEOs’ elite networks from the top 2 universities in China – Peking University & Tsinghua University) are significantly negatively related to QFIIs’ holdings whereas CEOs’ political connections (i.e., CEOs’ formal position interlock & political background) are significantly positively related to QFIIs’ investment. The findings also show that QFIIs prefer to invest in cross-listed firms with higher capitalization and enhanced performance. Our research confirms the central view of social capital theory that social networks have value, but also supplements the literature by finding that social capital may have greater benefit for CEOs rather than shareholders.

KEYWORDS:

• Qualified foreign institutional investors
• political ties
• political connections
• CEOs’ social capital
• foreign institutional investors’ holdings

JEL:

• G23
• G38
• Z13

Acknowledgments

We appreciate the comments and suggestions of anonymous reviewers. We thank the participants at the November 2021 FIRN PhD symposium and the July 2021 AFAANZ conference for their helpful comments that improved the quality of the paper.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary Material

Supplemental data for this article can be accessed on the publisher’s website

Notes

1. China has two stock markets (Shanghai and Shenzhen Stock Exchanges), each of them has both A-share stock market and B-share stock market. The transaction in A-share market is based on Renminbi, while B-share market is based on foreign currency (e.g. US dollars in Shanghai stock exchange market and HK dollars in Shenzhen stock exchange market).

2. See Table 1 for detailed information on each of these sixteen enactment and modifications of deregulation.

3. Please see the complete content of this “Measures” through http://www.csrc.gov.cn/pub/csrc_en/newsfacts/release/200708/t20070810_69192.html

4. Most of CEOs’ names are not available in CSMAR database for fiscal year 2019 while conducting this study.

5. Zongcai or Shouxizhixingguan in Chinese.

6. Zongjingli in Chinese.

7. All the covariates are lagged by one year.

8. China’s dominant search engine.

9. In terms of the business sector, an incumbent business executive might concurrently be a member of a political party or a delegate of political activities. For example, Wanjianlin, the founder of Dalian Wanda Group (the largest real estate development firm in China), is also a delegate to the CNPC (Chinese National People’s Congress).

10. We extract these eight categories form CSMAR database.

11. According to Wu et al. (2012), politically connected managers can obtain three forms of favorable treatment from the government, including easier access to bank loans, market power and tax benefit. As listed firms commonly have good reputation for accessing to bank loans and market power data is hard to obtain, tax benefit is used as a proxy for favorable treatment from government.

12. In May,1998, the China Ministry of Education (MOE) issued “The Action Plan for Education Revitalization for the Twenty-first Century”, which signified the formal launch of the “985 Project”. There are 39 “985 Project” universities, representing 2% of the total HEIs in China.

13. These are nine universities agreed to create a Chinese counterpart to the American Ivy League, which converted to the famous “C9 League”. There universities are Peking University, Zhejiang University, Tsinghua University, Nanjing University, Harbin Institute of Technology, Xi’an Jiao Tong University, Fudan University, University of Science and Technology of China, Shanghai Jiao Tong University.