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How Do Foreign Traders Affect Stock‐Pricing Efficiency? Microstructure‐based Evidence from Korea*

How Do Foreign Traders Affect Stock‐Pricing Efficiency? Microstructure‐based Evidence from Korea* We analyze how foreign ownership relates to the short‐term pricing efficiency of common stocks listed on the Korea Stock Exchange. We find that stocks with greater foreign holdings are priced less efficiently. This result is robust to different efficiency measures, estimation methods, and reverse causality concerns. Our evidence suggests that foreign trading deters price corrections, at least in the short term, and thus, has a negative effect on utilitarian traders. Our findings in relation to potential losses provide new insights into the downside risk of financial liberalization at the market microstructure level. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Financial Studies Wiley

How Do Foreign Traders Affect Stock‐Pricing Efficiency? Microstructure‐based Evidence from Korea*

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Publisher
Wiley
Copyright
Copyright © 2021 Korean Securities Association
ISSN
2041-9945
eISSN
2041-6156
DOI
10.1111/ajfs.12343
Publisher site
See Article on Publisher Site

Abstract

We analyze how foreign ownership relates to the short‐term pricing efficiency of common stocks listed on the Korea Stock Exchange. We find that stocks with greater foreign holdings are priced less efficiently. This result is robust to different efficiency measures, estimation methods, and reverse causality concerns. Our evidence suggests that foreign trading deters price corrections, at least in the short term, and thus, has a negative effect on utilitarian traders. Our findings in relation to potential losses provide new insights into the downside risk of financial liberalization at the market microstructure level.

Journal

Asia-Pacific Journal of Financial Studies – Wiley

Published: Aug 1, 2021

Keywords: Foreign trader

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