Foreign investors and stealth trading: An examination of price movements in developing markets

We investigate whether foreign investors have better information than domestic investors. We are motivated by (1) the controversy over the performance of foreign versus domestic investors and (2) market dynamics that require investors to adapt constantly. Using 123 positive and 81 negative news items from the Indonesia Stock Exchange (IDX), we find that foreign investors account for larger price movements before news announcements, suggesting that foreign investors tend to have better information than domestic investors. The result is robust, even after including the total trading volume, total number of transactions, and trading size. Further investigation reveals that foreign investors' small trades account for the largest price movements. Initiated trades account for larger price movements. Domestic investors have more foreign advantages than foreign investors. We also find that the foreign advantage disappears during non-event periods. Our results contrast with previous findings showing that domestic investors have better information than foreign investors. Our findings suggest that investor behavior is dynamic; investors adjust to their environment, which may lead to changes in their performance.