Information Asymmetry And The Role Of Foreign Investors In Daily Transactions During The Crisis; A Study Of Herding In The Indonesian Stock Exchange

Abstract

The purpose of this study is to prove that there was herding behavior by domestic investors following that of foreign investors in the Indonesian Capital Market (IDX) and that the herding was influenced by information asymmetry. It began when global investors undertook international diversification to the IDX because the returns on their portfolios were not on the efficient frontier during the crisis and because of the low correlation between Indonesia’s economy and the American and European economies. Utilizing the IDX daily transaction data during the years 2009-2011, the herding behavior of domestic investors, which followed that of foreign investors, was tested by Lakonishok models as was the influence of information asymmetry on the herding. It was found that the herding behavior in the IDX occurred in buy, sell or entire herdings (buy and sell). There were 0.40 to 0.55 buy herdings and 0.20 to 0.40 sell herdings during the crisis in 2008 and 2009. Buy herding then continued in 2010 onwards, although with lower intensity (0.05 to 0.20); however, sell herding decreased dramatically, and there has been almost no sell herding since then. Nevertheless, domestic investors did then sell in the opposite strategy, which was to sell when foreign investors tended to buy. Subsequent findings demonstrated that herding occurred with the influence of information asymmetry between domestic and foreign investors.