SIFR Research Report Series, Institute for Financial Research
Foreigners´ Trading and Price Effects Across Firms
() and Göran Robertsson
Abstract: We study the investment behavior of foreign investors in
association with an equity market liberalization, and find a strong link
between foreigners´ trading and local market returns. In the period
following the liberalization, foreigners´ net purchases led to a permanent
increase in prices, or equivalently, a permanent reduction of the cost of
equity capital. We also find a strong link between a firm´s fraction of
foreign ownership and the magnitude of the reduction of cost of capital.
Foreign investors seem to prefer large and well-known forms, and these
forms realize the most sizeable cuts in capital costs. Furthermore, our
analysis suggests that foreigners act like non-informed feedback traders.
In particular, they increase their net holding in firms that have recently
perfoemd well. Analyzing foregners´ performance, we find very little
evidence of informed trading, suggesting that risk sharing is the most
plausible explanation for the reduction in the cost of equity capital.
Keywords: Feedback Trading; Momentum; Portfolio Flows; (follow links to similar papers)
JEL-Codes: G11; G12; G14; G15; (follow links to similar papers)
33 pages, December 15, 2001
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