نگهداری سرمایه گذاران خارجی و بازده حقوق صاحبان سهام بازار نوظهور: شواهدی از کره

This paper studies the effect of herding by foreign investors on stock returns in the Korean market. We conduct both pre and post-liberalization analyses and utilize a three-stage least squares analysis in order to control for the simultaneous relationship. We find evidence of a significant impact of foreign investor herding on stock returns in addition to intra-year positive feedback trading by foreign investors. However, changes in domestic institutional ownership do not have any significant effect on stock returns. In addition, foreign investors tend to buy/sell shares that domestic institutions sell/buy in the herding year.

Much has been written about the explanatory potential of herding and the associated feedback trading with various phenomena including stock price movements, momentum and even volatility.1 However, to the best of our knowledge, there has been little research on the impact of foreign investors in newly liberalized markets. Over the last few decades, one of the most important trends in international markets is the liberalization of financial markets in emerging economies. Financial market liberalization has provided global investors with new investment opportunities to invest in what were restricted domestic securities. We believe this resultant growth of foreign ownership in emerging markets is of great significance to researchers interested in understanding the impact of trading behaviors of global investors on local markets as well as to investors — foreign and domestic, individual and institutional. One of the most successful emerging markets is the Korean market which has several unique characteristics that make it of great interest to those curious about investment behavior. Normally domestic institutional investors are recognized as the most important investment group — particularly in more established markets.2 However, they may not be the most influential class in some emerging markets. In Korea foreign investors, most of whom are U.S. and European institutional investors, hold more than 40% of the total market capitalization while domestic institutional investors hold approximately 17% (as of 2003) with the remainder held by individuals or non-financial companies. This structure is common in emerging markets, particularly in East-Asian markets with the recent innovation of foreign investment. We add to the literature by concentrating on four issues. First, we investigate the cross-sectional relationship between changes in foreign or domestic institutional ownership and stock returns. This seeks to assess the relative importance of herding by foreign or domestic institutional investors in the Korean market. We generally follow Nofsinger and Sias' (1999) ownership change portfolio approach. We then extend the work by performing a three-stage least squares regression (3SLS) analysis controlling for simultaneity between changes in foreign or domestic institutional ownership and abnormal stock returns. Further, we consider the change of economic regime by dividing the sample period into two sub-periods, pre- and post-1998, when the Korean government abolished the limits on foreign equities ownership. Second, we examine whether changes in foreign or domestic institutional ownership are related to positive feedback trading. Third, we examine whether changes in foreign or domestic institutional ownership are consistent with information cascades.3 Finally, we investigate the possible existence of information asymmetries between foreign and domestic institutions. Even though a number of papers focus on herding by institutions or retail investors, to our knowledge, this is the first study that investigates herding by foreign investors and its impact on emerging market stock returns. We find a strong and positive relation between changes in foreign ownership and stock returns. After 1998, when the foreign ownership limit was abolished in the Korean market, the relationship becomes even stronger. Since the ownership data is observed once at the end of the year, the significant correlation between changes in foreign ownership and abnormal returns may come from either the positive impact of changes in foreign ownership on stock returns or intra-year positive feedback trading by foreign investors. We further investigate both hypotheses using three-stage least squares (3SLS) analysis and find that the results are supportive of both hypotheses. We also find little evidence that changes in domestic institutional ownership have a significant effect on stock returns. Neither foreign nor domestic institutional herding is consistent with information cascades — ownership changes during the herding year are not positively correlated with those during the pre-herding year. In addition, we find evidence of information asymmetries between foreign and domestic institutions. This suggests that foreign institutions tend to buy/sell shares that domestic institutions sell/buy in the herding year. The study is organized as follows. In Section 2, we introduce the theory and empirical evidence on institutional herding. Section 3 describes the data and methodology used in this study and addresses general findings on foreign and domestic institutional herding in Korea. Section 4 examines the effect of herding by foreign investors on stock prices. In Section 5, we discuss additional issues related to pre-herding behavior by foreign investors. In Section 6, we examine informational cascades and information asymmetries and Section 7 concludes.

The liberalization of financial markets in emerging economies usually results in the growth of foreign ownership of domestic securities. In Korea, foreign investors, most of whom are institutional investors from the U.S and Europe, hold more than 40% of the total market capitalization while domestic institutional investors hold only about 17%. This has attracted the attention of researchers who seek to understand the impact of trading behaviors of global investors on emerging markets. In this paper, we extend the literature on institutional herding and feedback trading and explore how foreign ownership changes are related to stock returns. More specifically, this study focuses on four issues. First, it examines the cross-sectional relation between changes in foreign and domestic institutional ownership and stock returns. This serves to assess the importance of herding by foreign and domestic institutional investors in the Korean market. In addition, we consider the change of economic regimes by dividing the sample period into two sub-periods, pre- and post-1998 when the Korean government abolished the limit on foreign ownership. Secondly, we examine whether changes in foreign and domestic institutional ownership are related to positive feedback trading. Third, we examine whether ownership changes are consistent with information cascades and further test for information asymmetries between foreign and domestic institutions. We find a strong and positive relation between changes in foreign ownership and stock returns. After 1998, when the foreign ownership limit was abolished in the Korean market, the relationship became even stronger. Since the ownership data is observed once at the end of the year, the significant correlation between changes in foreign ownership and abnormal returns may come from either the positive impact of changes in foreign ownership on stock returns or intra-year positive feedback trading by foreign investors. We further investigate both hypotheses using three-stage least squares (3SLS) analysis and find that the results are supportive of both hypotheses. We also find little evidence that changes in domestic institutional ownership have a significant effect on stock returns. Neither foreign nor domestic institutional herding is consistent with information cascades — ownership changes during the herding year are not positively correlated with those during the pre-herding year. In addition, we find evidence of information asymmetries between foreign and domestic institutions. This suggests that foreign institutions tend to buy/sell shares that domestic institutions sell/buy in the herding year.