Do Foreign Investors Perform Better than Locals? - Information Asymmetry, Investor Sophistication, and Market Liquidity
25 Pages Posted: 31 Dec 2003
Date Written: January 26, 2002
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: Suggested Citation