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Foreigners´ Trading and Price Effects Across Firms

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  • Dahlquist, Magnus

    ()
    (Swedish Institute for Financial Research)

  • Robertsson, Göran

    ()
    (Swedish Institute for Financial Research)

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    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.

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    Bibliographic Info

    Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 1.

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    Length: 33 pages
    Date of creation: 15 Dec 2001
    Date of revision:
    Handle: RePEc:hhs:sifrwp:0001

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    Keywords: Feedback Trading; Momentum; Portfolio Flows;

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