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

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

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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File URL: http://www.sciencedirect.com/science/article/B6VHN-4S7BDN4-1/2/9f5e7c4b55b5ff1b63d519bd9606e167
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/finmar

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  1. Choe, Hyuk & Kho, Bong-Chan & Stulz, Rene M., 2004. "Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea," Working Paper Series 2004-6, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Michael J. Brennan. and H. Henry Cao., 1997. "International Portfolio Investment Flows," Research Program in Finance Working Papers RPF-271, University of California at Berkeley.
  3. 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.
  4. Harald Hau, 2001. "Location Matters: An Examination of Trading Profits," Journal of Finance, American Finance Association, vol. 56(5), pages 1959-1983, October.
  5. 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.
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