The Behavior and Performance of Foreign Investors in Emerging Equity Markets: Evidence from Taiwan

Abstract

This study investigates trading behavior and investment performance of foreign investors in 60 large-size firms listed on the Taiwan Stock Exchange. Strong evidence is found that foreign investors employ momentum strategies of buying past winners and selling past losers and favor large-size, high book-to-market, and high-tech stocks, while no evidence is found that foreign investors herd on market consensus. Findings show that foreign investors are short-term superior performers but long-term inferior performers. The short-term superior performance appears to be driven partially by price momentum of winners portfolios rather than by risk taking. After controlling for firm size, share turnover, and industry, foreigners' short-term performance in large-size, high-turnover, and high-tech stocks is better than it is in small-size, low-turnover, and non-high-tech stocks. Copyright (c) International Review of Finance Ltd. 2003.

Do investors herd in emerging stock markets?: Evidence from the Taiwanese market

“…For a majority of the sectors analyzed, we do not find any evidence in favor of herd formation during periods of large market swings. This finding is consistent with Lin and Swanson (2003) who tested whether foreign investors herd in the Taiwanese stock market using the same methodology. Similar to their findings, our regressions yield statistically significant and positiveˇestimates indicating that equity return dispersions increase during periods of large price changes as predicted by CAPM.…”

“…With the exception of Tan et al (2008), prior studies generally provide results in favor of the rational asset pricing theories and conclude that herding is not an important factor in determining security returns during periods of market stress. In a limited study using sixty highest capitalization stocks held by foreign investors in Taiwan, Lin and Swanson (2003) employ the cross-sectional standard deviation based methodology and find no evidence that foreign investors herd in this market.…”

“…This methodology has been used by Christie and Huang (1995), Chang et al (2000), Gleason et al (2003), Lin and Swanson (2003), Gleason et al (2004), and Demirer and Kutan (2006). Cross-sectional standard deviations (CSSD), used as a measure of return dispersion, is formulated as follows:…”

“…However, their study examines firm level return data within the market portfolio without classifying individual firms into specific sectors. Lin and Swanson (2003) also study herd behavior in the Taiwanese stock market during the period 1996-2003 again using one of the methodologies we employ here, but they focus only on foreign investors and the most liquid stocks without classifying them into sector groups. They find no evidence that foreign investors herd in this market.…”

A Closer Look at the Characteristics of Stock Holdings of Foreign and Local Investors in the Indonesian Stock Exchange (Idx)

“…Adding more variables to the examination of characteristics of foreign ownership in Taiwan's market, Lin and Swanson (2003) found that large market capitalization, high book to market ratios and high-tech firms appeared to be leading factors, whilst earnings to price ratio, debt ratio and return volatility are insignificant variables.…”