The liability of foreignness in international equity investments : evidence from the US stock market
Using foreign institutional ownership data in the US from 1990 to 2007, we examine whether foreign institutional investors face liabilities of foreignness (LOF) in the US stock market. We find that foreign institutional investors prefer low information asymmetry stocks more than domestic institution...
| Main Authors: | , , , |
|---|---|
| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2013
|
| Subjects: | |
| Online Access: | https://hdl.handle.net/10356/99303 http://hdl.handle.net/10220/17408 |
| _version_ | 1826118243122675712 |
|---|---|
| author | Baik, Bok Kang, Jun-Koo Kim, Jin-Mo Lee, Joonho |
| author2 | Nanyang Business School |
| author_facet | Nanyang Business School Baik, Bok Kang, Jun-Koo Kim, Jin-Mo Lee, Joonho |
| author_sort | Baik, Bok |
| collection | NTU |
| description | Using foreign institutional ownership data in the US from 1990 to 2007, we examine whether foreign institutional investors face liabilities of foreignness (LOF) in the US stock market. We find that foreign institutional investors prefer low information asymmetry stocks more than domestic institutional investors do, and this preference for low information asymmetry stocks is particularly strong among foreign institutional investors from countries with high LOF. More importantly, we find that a change in foreign institutional ownership is negatively related to future returns, whereas this relation does not exist for domestic institutional ownership. The negative relation between the change in foreign institutional ownership and future returns is more pronounced when investors face a greater LOF in the US stock market – for instance, when they are from countries with higher institutional distance, information asymmetry, unfamiliarity, and cultural differences. The negative effect of country-specific LOF factors on the return-forecasting power of foreign institutional investors is more evident when they trade stocks with higher information asymmetry. Overall, these findings suggest that foreign institutional investors face significant LOF costs in the US stock market, resulting in their poor ability to forecast returns. |
| first_indexed | 2024-10-01T04:40:31Z |
| format | Journal Article |
| id | ntu-10356/99303 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T04:40:31Z |
| publishDate | 2013 |
| record_format | dspace |
| spelling | ntu-10356/993032023-05-19T06:44:40Z The liability of foreignness in international equity investments : evidence from the US stock market Baik, Bok Kang, Jun-Koo Kim, Jin-Mo Lee, Joonho Nanyang Business School DRNTU::Business::International business Using foreign institutional ownership data in the US from 1990 to 2007, we examine whether foreign institutional investors face liabilities of foreignness (LOF) in the US stock market. We find that foreign institutional investors prefer low information asymmetry stocks more than domestic institutional investors do, and this preference for low information asymmetry stocks is particularly strong among foreign institutional investors from countries with high LOF. More importantly, we find that a change in foreign institutional ownership is negatively related to future returns, whereas this relation does not exist for domestic institutional ownership. The negative relation between the change in foreign institutional ownership and future returns is more pronounced when investors face a greater LOF in the US stock market – for instance, when they are from countries with higher institutional distance, information asymmetry, unfamiliarity, and cultural differences. The negative effect of country-specific LOF factors on the return-forecasting power of foreign institutional investors is more evident when they trade stocks with higher information asymmetry. Overall, these findings suggest that foreign institutional investors face significant LOF costs in the US stock market, resulting in their poor ability to forecast returns. 2013-11-07T08:20:45Z 2019-12-06T20:05:33Z 2013-11-07T08:20:45Z 2019-12-06T20:05:33Z 2013 2013 Journal Article Baik, B., Kang, J. K., Kim, J. M., & Lee, J. (2013). The liability of foreignness in international equity investments : evidence from the US stock market. Journal of international business studies, 44, 391-411. https://hdl.handle.net/10356/99303 http://hdl.handle.net/10220/17408 10.1057/jibs.2013.13 en Journal of international business studies |
| spellingShingle | DRNTU::Business::International business Baik, Bok Kang, Jun-Koo Kim, Jin-Mo Lee, Joonho The liability of foreignness in international equity investments : evidence from the US stock market |
| title | The liability of foreignness in international equity investments : evidence from the US stock market |
| title_full | The liability of foreignness in international equity investments : evidence from the US stock market |
| title_fullStr | The liability of foreignness in international equity investments : evidence from the US stock market |
| title_full_unstemmed | The liability of foreignness in international equity investments : evidence from the US stock market |
| title_short | The liability of foreignness in international equity investments : evidence from the US stock market |
| title_sort | liability of foreignness in international equity investments evidence from the us stock market |
| topic | DRNTU::Business::International business |
| url | https://hdl.handle.net/10356/99303 http://hdl.handle.net/10220/17408 |
| work_keys_str_mv | AT baikbok theliabilityofforeignnessininternationalequityinvestmentsevidencefromtheusstockmarket AT kangjunkoo theliabilityofforeignnessininternationalequityinvestmentsevidencefromtheusstockmarket AT kimjinmo theliabilityofforeignnessininternationalequityinvestmentsevidencefromtheusstockmarket AT leejoonho theliabilityofforeignnessininternationalequityinvestmentsevidencefromtheusstockmarket AT baikbok liabilityofforeignnessininternationalequityinvestmentsevidencefromtheusstockmarket AT kangjunkoo liabilityofforeignnessininternationalequityinvestmentsevidencefromtheusstockmarket AT kimjinmo liabilityofforeignnessininternationalequityinvestmentsevidencefromtheusstockmarket AT leejoonho liabilityofforeignnessininternationalequityinvestmentsevidencefromtheusstockmarket |