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Foreigners Trading and Price Effects Across Firms

30 Pages Posted: 19 Nov 2001  

Magnus Dahlquist

Stockholm School of Economics

Göran Robertsson

Swedish National Debt Office

Date Written: October 2001

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.

Keywords: Feedback trading, momentum, portfolio flows

JEL Classification: G11, G12, G14, G15

Suggested Citation

Dahlquist, Magnus and Robertsson, Göran, Foreigners Trading and Price Effects Across Firms (October 2001). CEPR Discussion Paper No. 3033. Available at SSRN: https://ssrn.com/abstract=290960

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Göran Robertsson

Swedish National Debt Office ( email )

Jakobsbergsgatan 13
Stockholm, 103 74
Sweden

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