Political Turmoil and the Impact of Foreign Orders on Equity Prices

Abstract

This paper examines whether foreign investors possess an information advantage over local investors in the Turkish stock market between 2007 and 2015. We find that foreign investors have an information advantage in 24 stocks, corresponding to seven percent of the sample firms. Foreign investors’ information advantage tends to prevail primarily during a period of political instability, which started with the Gezi Park protests in June 2013. The adverse selection component of the foreign trade spreads, which reflects a permanent change in stock prices, rises significantly after June 2013, by 66 bps. Our results suggest that domestic investors’ funding constraints, which limit their ability to impart their information on stock prices, may give foreign investors a relative information advantage during periods of political turmoil.

Keywords: Information Asymmetry, Market Microstructure, Emerging Markets, Political Turmoil

JEL Classification: G14