Do Foreign Investors Perform Better than Locals? - Information Asymmetry, Investor Sophistication, and Market Liquidity

25 Pages Posted: 31 Dec 2003

See all articles by Woochan Kim

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Date Written: January 26, 2002

Abstract

This study analyzes the extent to which information asymmetry, investor sophistication, and market liquidity affect the relative performance of different investor groups(foreigners, local institutions, and local individuals), using a daily transaction data from the Korea Stock Exchange over a four-year period. Empirical findings show that, in large stocks, where information asymmetry problem is small, foreigners outperform locals, reflecting the degree of investor sophistication. In small stocks, where information asymmetry problem is grave, however, foreigners turned out to under-perform locals. Findings also show that, due to market liquidity, foreigners are disadvantaged when trading large chunk of shares. The popular strategy of tracking foreigners also turned out to have greatest profitability in large stock, where information asymmetry problem is small.

Keywords: information asymmetry, investor sophistication, and market liquidity

JEL Classification: G150

Suggested Citation

Kim, Woochan, Do Foreign Investors Perform Better than Locals? - Information Asymmetry, Investor Sophistication, and Market Liquidity (January 26, 2002). KDI School of Pub Policy & Management Paper. Available at SSRN: https://ssrn.com/abstract=480542 or http://dx.doi.org/10.2139/ssrn.480542

Woochan Kim (Contact Author)

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/professor/wckim

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

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