Does Trading by Foreign Investors Contribute More to Stock Price Informativeness than Trading by Domestic Institutions in Emerging Markets? Korean Evidence

Abstract

Using a large sample of firms listed on the Korea Stock Exchange over the 1992-2002 period, this paper investigates a hitherto unexplored question of whether and how trading by foreign and domestic institutional investors improves the extent to which firm-specific information is incorporated into stock prices which we call stock price informativeness. Our results reveal the following. First, stock price informativeness increases significantly with the intensity of trading by foreign investors and domestic institutional investors. Second, trading by foreign investors facilitates the incorporation of firm-specific information into stock prices to a greater extent than trading by domestic institutions. Third, among domestic institutions with different investment horizons, short-term institutions such as securities companies play a more important role in accelerating firm-specific information capitalization into stock prices, compared with long-term institutions such as banks and insurance companies. Finally, our results indicate that the complete abolishment of foreign ownership restrictions in 1998 has significantly improved the information role of foreign investors in the Korean stock market.