Do Domestic Investors Have an Information Advantage? Evidence from Indonesia

Abstract

Using transaction data from Indonesia, this paper shows that domestic investors have higher profits than foreign investors. In addition, clients of global brokerages have higher long-term and smaller medium (intramonth) and short (intraday) term profits than clients of local brokerages. This suggests that clients of local brokerages have a short-lived information advantage, but that clients of global brokerages are better at picking long-term winners. Finally, domestic clients of global brokerages have higher profits than foreign clients of global brokerages, suggesting that the combination of local information and global expertise leads to higher profits. Copyright 2005 by The American Finance Association.

Who Knows Better in an Emerging Market? Performance of Institutions, Foreigners and Individuals

“…This higher role of individuals in trading smaller stocks is consistent with the US market ( Barber, Odean, & Zhu, (2008)). Foreign investors, in turn, have the smallest share of the trading value in all quartiles, which coincides with those reported for Indonesia (Dvořák, 2005), Korea (Choe et al, 2005), and Taiwan (Barber, et al, 2006). When trading activity is measured by number of trades, institutions and individuals change places.…”

“…Moreover, different short-term and long-term performance measures indicate that local institutions are more effective traders than foreigners who in turn are more effective traders than local individuals. Our results reconcile the apparently contradictory findings of previous papers which have indicated a local advantage (Agarwal et al, 2009;Brennan & Cao, 1997;Dvořák, 2005;Hau, 2001), versus those concluding the opposite (Ferreira, Matos, & Pereira, 2009;Grinblatt & Keloharju, 2000;Huang & Shiu, 2009). In addition, we are able to reconcile the apparently contradictory results of Choe et al (2005), who report an advantage of local individuals over foreigners, with Barber et al (2009) who suggest the opposite.…”

“…We propose a net profit measured, roughly following Dvořák (2005), based on the next-day increase in value of the position of a type of investor " " due to the net buy on day " " and the price increase in " + 1". We normalize it with the average trading value per type of investor, as follows:…”

“…In emerging markets, 3 a number of recent papers show that locals perform better (see e.g. Agarwal, Faircloth, Liu and Rhee, (2009) and Dvořák (2005) for Indonesia, Chan, Menkveld, & Yang (2008) for China, and Choe, Kho, & Stulz (2005) for Korea). Moreover, in the context of financial crises several studies report that locals better anticipated crashes than foreigners (See e.g.…”

Dynamic Interactions between Foreign Institutional Investment Flows and Stock Market Returns – The Case of India

“…Therefore, it is plausible that global institutional investors invest in acquiring information, owing to their resources, size, domain expertise, global experience and niche skills. Dvořák (2005) mediates these disagreements, finding that global investors lack local information but possess expertise.…”