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Foreigners´ Trading and Price Effects Across Firms

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    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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    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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    2. Woochan Kim & Shang-Jin Wei, 1999. "Foreign Portfolio Investors Before and During a Crisis," NBER Working Papers 6968, National Bureau of Economic Research, Inc.
    3. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Scholarly Articles 27693805, Harvard University Department of Economics.
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    15. Bohn, Henning & Tesar, Linda L, 1996. "U.S. Equity Investment in Foreign Markets: Portfolio Rebalancing or Return Chasing?," American Economic Review, American Economic Association, vol. 86(2), pages 77-81, May.
    16. Anusha Chari & Peter Blair Henry, 2001. "Stock Market Liberalizations and the Repricing of Systematic Risk," NBER Working Papers 8265, National Bureau of Economic Research, Inc.
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    18. Säfvenblad, Patrik, 1998. "The Informational Advantage of Foreign Investors: An Empirical Study of the Swedish Bond Market," SSE/EFI Working Paper Series in Economics and Finance 240, Stockholm School of Economics.
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