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Why do foreign investors underperform domestic investors in trading activities? Evidence from Indonesia

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Author Info

  • Agarwal, Sumit
  • Faircloth, Sheri
  • Liu, Chunlin
  • Ghon Rhee, S.

Abstract

Foreign investors generally underperform domestic investors in trading activities. This study shows that their inferior performance is attributable to non-initiated orders. Foreign investors actually perform better than domestic investors in initiated orders. In addition, their performance is also mixed when trades are classified depending on who the counterparties are. These mixed performances can be explained by neither the information disadvantage hypothesis proposed by [Dvorák, T., 2005. Do domestic investors have an information advantage? Evidence from Indonesia. Journal of Finance 60, 817-839.] nor the poor timing of trade hypothesis suggested by [Choe, H., Kho, B.C., Stulz, R., 2005. Do domestic investors have an edge? The trading experience of foreign investors in Korea. Review of Financial Studies 18, 795-829.]. We propose and confirm that their inferior performance is explained by their aggressive trading behavior. Three metrics we utilize to measure the aggressiveness of foreign investors' trading provide overwhelmingly strong evidence that foreign investors are more aggressive than their domestic counterparts.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 12 (2009)
Issue (Month): 1 (February)
Pages: 32-53

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Handle: RePEc:eee:finmar:v:12:y:2009:i:1:p:32-53

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Web page: http://www.elsevier.com/locate/finmar

Related research

Keywords: Trading performance Foreign investor Domestic investor Poor timing of trade hypothesis Information advantage hypothesis Aggressive trading hypothesis Initiated orders Non-initiated orders Indonesian stock market;

References

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  1. Chan, Kalok & Menkveld, Albert J. & Yang, Zhishu, 2006. "Are Domestic Investors Better Informed than Foreign Investors? : Evidence from the Perfectly Segmented Market in China," Serie Research Memoranda 0004, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  2. Brennan, Michael J & Cao, H Henry, 1997. " International Portfolio Investment Flows," Journal of Finance, American Finance Association, vol. 52(5), pages 1851-80, December.
  3. Hyuk Choe & Bong-Chan Kho & René M. Stulz, 2005. "Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 795-829.
  4. Tomás Dvorák, 2005. "Do Domestic Investors Have an Information Advantage? Evidence from Indonesia," Journal of Finance, American Finance Association, vol. 60(2), pages 817-839, 04.
  5. Harald Hau, 2001. "Location Matters: An Examination of Trading Profits," Journal of Finance, American Finance Association, vol. 56(5), pages 1959-1983, October.
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Citations

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Cited by:
  1. Rhee, S. Ghon & Wang, Jianxin, 2009. "Foreign institutional ownership and stock market liquidity: Evidence from Indonesia," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1312-1324, July.
  2. Sumit Agarwal & I‐Ming Chiu & Chunlin Liu & S. Ghon Rhee, 2011. "The Brokerage Firm Effect In Herding: Evidence From Indonesia," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 34(3), pages 461-479, 09.
  3. Vo, Xuan Vinh, 2010. "Foreign ownership in Vietnam stock markets - an empirical analysis," MPRA Paper 29863, University Library of Munich, Germany, revised 10 Jan 2011.
  4. Nadia Belkhir Boujelbene & Abdelfatteh Bouri & Jean-Luc Prigent, 2014. "Corporate Governance and Market Microstructure: Evidence on Institutional Investors in the Tunisian Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 62-75, April.

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