The Impact of Foreign Investor Trading Activity on Vietnamese Stock Market

Abstract

The Literature Review Financial Liberalization and Stock Market DevelopmentFinancial liberalization plays an important role on developing equity market in emerging countries. Henry (2000) conducts the research on the sample of 12 emerging markets and gives and strong evidence to prove that equity index witnesses the significant abnormal return after government opens capital market. By using some control variables like world stock return, macroeconomic factors and concurrent economic reforms, this paper suggests that cost of capital will be reduced by sharing risks between foreign and domestic investors. This is one big advantage that stock market liberalization brings to emerging countries. In these markets, asymmetric information as well as investment experience is always prevalent problem for individual investors. That is a reason why foreign sector plays an important role on leading the movement of market. With the same conclusion, Bekaert & Harvey (2000) confirm that capital market integration reduces cost of capital as well as increases economic growth. Moreover, the reason for foreign investors to be attracted by emerging markets is to seek diversification for their portfolio. Stulz (1999) gives two channels to reduce cost of capital. First, financial liberalization decreases discount rate and second, expected cash flow increases due to increase in monitoring of management and shareholders. However, this study also points out that the significant reduction in cost premium is very small because of home bias effect. Choosing which country and which company to invest is complicated procedure and it depends on many factors. Aggarwal, Klapper & Wysocky (2005) reveal that professional foreign investors tend to select the firms basing on not only their financial performance but also transparency and disclosure. The study of Levine & Zervos (1998) indicates that stock market becomes bigger with higher liquidity after government implements international integration policy in finance. The regulatory indicators become better and equity market becomes more efficient and informational. The easy access to information by domestic and foreign companies associates positively to stock market development. Kassimatis (2002) conducts the research in six countries: Argentina, India, Pakistan, Philippines, South Korea and Taiwan, which confirms that openness of financial market reduces its volatility. Several recent empirical researches also present the positive relationship between financial integration and equity market development. Cajueiro, Gogas, & Tabak (2009) reveal that Greek stock exchange receives many benefits from this phenomenon such as reducing cost of capital, improving market efficiency and economic environment.By contrast, some studies show opposite view about impact of financial liberalization on equity market. Kawakatsu & Morey (1999) illustrate that there is no significant difference in stock market before and after actual liberalization. Umutlu, Akdeniz, & Altay-Salih (2010) show strong evidence to...

Do Foreign Funds Affect Indonesian Capital Market Liquidity?

“…The phenomenon of foreign investors in the capital market is a global phenomenon. Rhee & Wang (2009), Ding et al, (2013), Lee & Chung, (2015); Nguyen et al, (2017) Lee & Chung, found that foreign investors had a positive effect on Amihud Illiquidity, but had a negative effect on bid-ask spreads. Nguyen et al (2017) show that foreign investors negatively affect liquidity on the Vietnamese Stock Market.…”

“…Rhee & Wang (2009), Ding et al, (2013), Lee & Chung, (2015); Nguyen et al, (2017) Lee & Chung, found that foreign investors had a positive effect on Amihud Illiquidity, but had a negative effect on bid-ask spreads. Nguyen et al (2017) show that foreign investors negatively affect liquidity on the Vietnamese Stock Market. Thanatawee also found that foreign investors negatively affected liquidity.…”

Foreign Ownership and Stock Return Volatility in Vietnam: the Destabilizing Role of Firm Size

“…Their low proportions of the trading volume and tendency towards the net purchase, as shown in Figure 2, also support this strategy. Also, their trading activities tend to become the pattern for domestic investors (Nguyen, 2017). These findings also contribute to explaining the stability of stock prices from a trading perspective.…”

“…Another study by Vo (2016b) adds that foreign investors in the Vietnam stock market focus on long-run perspectives rather than short-term gain by investigating the impact of foreign ownership on the corporate risk-taking activity for a sample of 263 Vietnamese listed companies in the 2007-2014 period. In other words, they pursue an inactive buy-and-hold investment strategy, which reduces the need for frequent trading for price discovery (Batten & Vo, 2015;Nguyen, 2017). Their low proportions of the trading volume and tendency towards the net purchase, as shown in Figure 2, also support this strategy.…”

Contemporary Research on Business and Management

“…Multiple researchers have conducted studies that are relevant to this study. , Nguyen (2017), and Samarakoon (2009) found that foreign investor trading activity caused a bi-directional impact on the stock market return, while Junior and Eid (2017) showed that the impact doubled during a crisis. Peranginangin et al (2016); Agudelo (2010); and Liew, Lim, and Goh (2018) DOI 10.1201/9781003196013-2 observed that trading inactivity reduced liquidity, and its impact was greater during a crisis.…”