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Does the difference in valuation between domestic and foreign investors help explain their distinct holdings of domestic stocks?

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  • Kang, Hyung Cheol
  • Lee, Dong Wook
  • Park, Kyung Suh
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    Abstract

    This paper proposes an investor heterogeneity approach to the different domestic stock holdings between domestic and foreign investors. Specifically, we hypothesize that domestic and foreign investors evaluate domestic stocks via different models and thus arrive at different valuations for them; consequently, the two investor groups are attracted to different sets of domestic stocks. Using panel data from Korea, we find strong support for our hypothesis. More precisely, we find that the foreign ownership of a stock increases with foreigners' valuation for the stock in excess of that of domestic investors. As we control for various firm characteristics known to be correlated with foreign ownership, our results indicate that the valuation difference between domestic and foreign investors can help explain the allocation of domestic stocks between the two groups over and above the existing explanations.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 12 (December)
    Pages: 2886-2896

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:12:p:2886-2896

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

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    Keywords: Investor heterogeneity Foreign investors Valuation difference Domestic stock holdings;

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    Cited by:
    1. Baltzer, Markus & Stolper, Oscar & Walter, Andreas, 2013. "Is local bias a cross-border phenomenon? Evidence from individual investors' international asset allocation," Discussion Papers 18/2013, Deutsche Bundesbank, Research Centre.
    2. Anderson, Christopher W. & Fedenia, Mark & Hirschey, Mark & Skiba, Hilla, 2011. "Cultural influences on home bias and international diversification by institutional investors," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 916-934, April.

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