Foreigners' Trading and Price Effects Across Firms

29 Pages Posted: 10 Mar 2002 Last revised: 14 Aug 2015

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Göran Robertsson

Swedish National Debt Office

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, net purchases by foreign investors induced a permanent increase in stock prices, suggesting that local firms reduced their cost of equity capital. We also find a strong link between a firm's fraction of foreign ownership and the magnitude of the cost reduction. Foreign investors seem to prefer large and well-known firms, and these firms realize the largest reduction in capital cost. Furthermore, our analysis suggests that foreigners increase their net holding in firms that have recently performed well. Analyzing foreigners' performance, we find very little evidence of informed trading, suggesting that risk sharing is the most plausible explanation for the reduction of 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. Journal of Banking and Finance, Vol. 28, 2004. Available at SSRN: https://ssrn.com/abstract=301959 or http://dx.doi.org/10.2139/ssrn.301959

Magnus Dahlquist

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Göran Robertsson (Contact Author)

Swedish National Debt Office ( email )

Olof Palmes gata 17
Stockholm, 103 74
Sweden
+46-8-6134500 (Phone)

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