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Foreigners Trading and Price Effects Across Firms

Author

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  • Dahlquist, Magnus
  • Robertsson, Göran

Abstract

We study the investment behaviour 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 firms, and these firms 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 performed well. Analysing foreigners' 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.

Suggested Citation

  • Dahlquist, Magnus & Robertsson, Göran, 2001. "Foreigners Trading and Price Effects Across Firms," CEPR Discussion Papers 3033, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3033
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    References listed on IDEAS

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    Cited by:

    1. Sornette, Didier & Zhou, Wei-Xing, 2004. "Evidence of fueling of the 2000 new economy bubble by foreign capital inflow: implications for the future of the US economy and its stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 332(C), pages 412-440.

    More about this item

    Keywords

    feedback trading; momentum; portfolio flows;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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