The role of the net purchase of stocks by foreign investors in boosting stock returns: Evidence from the Indonesian stock market

Abstract

Low reporting quality, as demonstrated by lower earnings informativeness, can exacerbate the information asymmetry gap, particularly in emerging markets. Although recent research shows that aggregate earnings can predict future economic growth, accruals, an important earnings component, are more likely to be manipulated in less sophisticated markets. Using data from Indonesia, we examine the impact of foreign stock investors' activities and accruals on stock returns. Our findings show that foreign stock investors' optimism, as measured by their net purchases of stocks, leads to higher excess returns. Foreign investors improve the quality of financial information. They provide benefits through two channels. First, foreign investors’ trading value significantly impacts stock prices in a thin market. Second, net stock purchases by foreign investors can help reduce information asymmetry. Our results contribute to the investment strategy by examining the relationship between sentiment generated by foreign investors and stock returns.