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

Agarwal, S and Faircloth, S and Liu, C and Ghon Rhee, S (2009) Why do foreign investors underperform domestic investors in trading activities? Evidence from Indonesia. Journal of Financial Markets, 12 (1). pp. 32-53.

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Abstract

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 [Dvořák, 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.

ISB Creators:
ISB CreatorsORCiD
Agarwal, SUNSPECIFIED
Item Type: Article
Uncontrolled Keywords: Aggressive trading hypothesis; Domestic investor; Foreign investor; Indonesian stock market; Information advantage hypothesis; Initiated orders; Non-initiated orders; Poor timing of trade hypothesis; Trading performance
Subjects: Business and Management
Depositing User: Ilammaran A
Date Deposited: 04 Nov 2014 14:35
Last Modified: 04 Nov 2014 18:44
URI: http://eprints.exchange.isb.edu/id/eprint/165
Publisher URL: http://dx.doi.org./10.1016/j.finmar.2008.04.001
Publisher OA policy: http://www.sherpa.ac.uk/romeo/issn/1386-4181/
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