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

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