Does expected presence of foreign institutional investors reduce cost of capital? - Case evidence from China

The Qualified Foreign Institutional Investors (QFII) scheme is Chinese government's decision of stock market liberalization to allow foreign institutional investors to purchase domestic shares. This paper is an event study on market reactions around the QFII announcement. We find negative abnormal returns in market indices in the short-term period following the announcement, and no significant abnormal returns in market indices in the long-term period thereafter. The, findings do not comply with the prediction of international asset pricing models. The QFII scheme may not help much in reducing the cost of equity capital and risk premium of China companies. Our findings may have some practical implications for China policy makers. It is possible that the QFII scheme is perceived to be too restrictive to attract foreign investors.