Why Do Foreign Investors Underperform Domestic Investors in Trading Activities? Evidence from Indonesia

37 Pages Posted: 1 Feb 2007 Last revised: 9 Mar 2008

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Sheri Faircloth

University of Nevada, Reno - College of Business Administration

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Chunlin Liu

University of Nevada, Reno - College of Business

Abstract

Foreign investors generally underperform domestic investors in trading activities. This study shows that their inferior performance is attributed to non-initiated orders. Foreign investors actually perform better than domestic investors in initiated orders. In addition, their performance is also mixed when trades are classified depending on who the counterparties are. These mixed performances can be explained by neither the information disadvantage hypothesis proposed by Dvoà159ák (2005) nor the poor timing of trade hypothesis suggested by Choe, Kho, and Stulz (2005). We propose and confirm that their inferior performance is explained by their aggressive trading behavior. Three metrics we utilize to measure the aggressiveness of foreign investors' trading provide overwhelmingly strong evidence that foreign investors are more aggressive than their domestic counterparts.

Keywords: Trading performance, Foreign Investor, Domestic investor, Poor timing of trade hypothesis, Information advantage hypothesis, Aggressive trading hypothesis, Initiated orders, Non-initiated orders, Indonesian stock market

JEL Classification: G14, G15

Suggested Citation

Agarwal, Sumit and Faircloth, Sheri and Rhee, S. Ghon and Liu, Chunlin, Why Do Foreign Investors Underperform Domestic Investors in Trading Activities? Evidence from Indonesia. Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=960370 or http://dx.doi.org/10.2139/ssrn.960370

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Sheri Faircloth

University of Nevada, Reno - College of Business Administration ( email )

Reno, NV 89557-0016
United States
775-784-6993 ext. 305 (Phone)
775-784-1769 (Fax)

HOME PAGE: http://www.scsr.nevada.edu/~fairclos

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

Chunlin Liu (Contact Author)

University of Nevada, Reno - College of Business ( email )

University of Nevada, Reno
Reno, NV 89557-0016
United States

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