Foreign investor dominance and low domestic investor absorption capacity: Implications on capital outflows

Abstract This study puts forward the increased share of foreign investors as a potential stabilizer for local financial markets, especially equity markets, because domestic investors' weak absorption capacity may create liquidity constraints acting as an obstacle for foreign investor. We pin down the effects of foreign investor dominance based on a detailed stock‐ownership data. Our findings suggest that in emerging financial markets with high foreign investor ownership and low absorption capacity of domestic investors, capital outflows might be staggered, and this phenomenon might reduce the probability of large and sudden depreciation of local currencies.