تأثیر مهار بر رفتار تجاری سرمایه گذاران خارجی: شواهدی از بازار سهام تایوان

On Taiwan's stock market, foreign institutional investors hold over one-third of the total market value and have enjoyed remarkable returns on their investments. Hence, it is important to investigate the trading behavior of foreign institutional investors. Previous studies have found that foreign institutional investors are momentum traders. This study documents a cognitive bias – anchoring effect – on foreign institutional investors’ trading decisions. Moreover, we document that foreign institutional investors’ momentum behavior is influenced (anchored) by prior foreign ownership (anchor). We also show that foreign investors’ momentum behavior is strengthened when prior foreign ownership is high. However, the anchoring effect cannot improve momentum profitability. In some cases, momentum profitability suffers because of the anchoring effect.

In financial literature, institutional investors are generally deemed to be informed traders. Hence, the behavior of institutional investors has attracted much interest from researchers; their decisions have become important indicators for retail investors in practice. Therefore, institutional trading has become a significant research issue over the past few decades. This issue is more noticeable in Taiwan's equity market since the proportion of trading by institutional investors (including foreign and local investors) in total trading volumes increased three fold between 1994 (10.2%) and 2011 (37.3%). This paper investigates the trading behavior of foreign institutional investors in Taiwan. There are two reasons why the analysis is focused on foreign institutional investors. First, among all types of institutional investors, trading volumes for foreign institutional investors have dominated local institutional investors. More specifically, as at the end of 2011, foreign institutional investors held about one-third, by market value, of the listed equities in Taiwan, whereas local institutional investors held only about 2% of the market value. This implies that foreign institutional investors’ trading behavior may have a larger impact on the stock market than the behavior of others. Second, as well as dominance in terms of trading volumes, foreign institutional investors’ profits have also been remarkable. Barber, Lee, Liu, and Odean (2009) found that nearly half of the individual investors in Taiwan's stock market had suffered losses from trading, and a huge sum (about 2.2% of Taiwan's GDP), has been garnered by foreign institutional investors.1 Therefore, it is important to look further into the trading behavior of foreign institutional investors in Taiwan. A large number of research studies have investigated the behavior of institutional investors. Related literature can easily fall into two groups. Some researchers have examined the holdings of foreign investors in the local market (e.g. Białkowski and Otten, 2011, Dahlquist and Robertsson, 2001, Ferreira and Matos, 2008, Kang and Stulz, 1997 and Lin and Swanson, 2003). These papers aimed to identify the characteristics of the stock holdings of foreign institutional investors. In general, their firm-level findings indicate that foreign institutional investors prefer to invest in stocks with high turnover rates and larger firm size. This disproportional holding of stocks reveals that global investors have particular preferences in terms of stock selection when forming their foreign asset combinations (Lin & Shiu, 2003). The other group of researchers is interested in investigating the dynamic trading pattern of institutional investors, especially how they incorporate past stock returns into their trading strategies (Badrinath and Wahal, 2002, Griffin et al., 2003, Grinblatt et al., 1995 and Ng and Wu, 2007). More specifically, these papers try to examine whether institutional investors are momentum traders or not. Most researchers have found that institutional investors are momentum traders (also referred to as positive feedback traders and trend followers), although the conclusions are still mixed. With respect to the related issue of foreign institutional investors, Grinblatt and Keloharju (2001) indicated that foreign investors tended to be momentum traders in the Finnish stock market. Our study follows the later stream of literature in order to examine the trading behavior of foreign institutional investors in the Taiwan stock market. Specifically, this paper contributes to the literature by examining whether the behavior of foreign institutional investors is influenced by their ownership, a form of anchoring effect. From the viewpoint of traditional financial theory, investors act rationally and consider all available information in their decision-making process. Accordingly, this implies that investors should act consistently on receipt of similar information. However, considerable evidence indicates that human psychology leads investors to irrational behavior and causes market anomalies (e.g. Kahneman and Tversky, 1979, Maymin, 2012 and Shleifer, 2000). Therefore, this paper uses a cognitive bias – ‘anchoring effect’ – to investigate whether foreign institutional investors act irrationally when they trade stocks that have similar attributes. This question is raised because of the debate, in prior researches, over investors’ investment behavior. For example, De Bondt (1993) suggested that investors expect a recent trend to continue and tend to make decisions that follow the trend. Andreassen (1988) showed that investors tend to sell stocks when the price is high and vice versa. In fact, this debate may be due to the differences between the participants’ background and experimental designs. This study, however, uses a real world dataset to analyze the behavioral bias of participants (foreign institutional investors) who have similar backgrounds, within one stock market, the Taiwanese stock market. Besides the potential contribution to literatures mentioned above, this paper tends to bridge our empirical findings and policy implications. In order to encourage foreign institutional investors to invest in the Taiwan stock market, the Taiwanese government revoked the qualified foreign institutional investors (QFII) system in October, 2003. The government also expects that foreign institutional investors will hold more than 50% of the market value in 2020. Therefore, by analyzing the behavior of foreign institutional investors, this study will attempt to discover some policy implications that will benefit market regulators and policy makers. The rest of this paper is organized as follows. Section 2 reviews the previous literature related to the anchoring effect on financial markets. Section 3 briefly introduces the research hypothesis and describes the data in detail. Section 4 provides an empirical analysis, and Section 5 concludes the study.

The anchoring effect is a cognitive bias whereby participants make their decisions by starting from an easily available reference value (anchor), even though this value is irrelevant. This paper provides the first empirical study on the anchoring effect in financial markets by analyzing the trading behavior of foreign institutional investors in the Taiwan stock market. The study documents its existence and its implication on the profitability of the prevailing momentum strategy. Prior foreign ownership is found to be important in determining the future course of any changes and it can be interpreted as an anchor for the investment decisions of foreign institution investors. Prior foreign ownership also affects the relationship between past stock returns and foreign investors’ trading behavior. This study confirms that foreign investors tend to be momentum traders, i.e., they buy past winners and sell past losers. Interestingly, momentum trading is intensified when prior foreign ownership is high. This paper also examined whether momentum behavior and anchoring effects are profitable in the Taiwanese market. It was found that the momentum profit is significantly positive but the anchoring effect may be counterproductive in generating profit. A negligible, if not negative, increase in trading profit occurred as a result of the anchoring effect. This study echoes the findings of Boehmer and Kelley (2009) and Campbell and Sharpe (2009) and confirms that the anchoring effect is embedded in market participants. Whether the anchoring effect extends to other types of investors and other markets are open questions yet to be explored. How the market condition affects the momentum strategy, and how it interacts with the anchoring effect, are also interesting questions for future research.