Foreigners´ Trading and Price Effects Across Firms

Magnus Dahlquist () and Göran Robertsson ()
Additional contact information
Magnus Dahlquist: Swedish Institute for Financial Research, Postal: Wallingatan 11, 3rd floor, SE- 111 60 Stockholm, Sweden, http://www.sifr.org
Göran Robertsson: Swedish Institute for Financial Research, Postal: Swedish Institute for Financial Research, Saltmätargatan 19A, SE-113 59 Stockholm, Sweden, http://www.sifr.org

No 1, SIFR Research Report Series from Institute for Financial Research

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.

Keywords: Feedback Trading; Momentum; Portfolio Flows (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G15 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2001-12-15
New Economics Papers: this item is included in nep-cfn and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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