Why Foreign Investors Trade More Frequently?

Abstract

We examine the portfolio turnover of mutual funds from 29 countries across the world and for the period 1999 to 2004. Our results indicate that turnover in foreign securities is higher in the countries that are less developed, have less investor protection, have lower information disclosure standard, and are less familiar to the fund managers. On the other hand, the relationship is much weaker for turnover in domestic securities. The negative relationship between turnover in foreign securities and quality of information disclosure or degree of familiarity are especially interesting as they are consistent with our conjecture that investors will trade more in the stocks that they know less, and this could well explain why the turnover in foreign securities is much higher than the turnover in domestic securities. Consistent with the behavioral biases, the turnover of mutual funds in the foreign markets increases if the markets perform well, and the biases are exacerbated when the fund managers know less about the foreign markets.

Keywords: Foreign turnover, Mutual Funds, Information Disclosure, Familiarity

JEL Classification: G11, G23