Information, Sophistication, and Foreign Versus Domestic Investors' Performance

42 Pages Posted: 22 Mar 2007 Last revised: 18 Oct 2011

See all articles by Li-Wen Chen

Li-Wen Chen

University of Mississippi

Shane A. Johnson

Texas A&M University - Department of Finance

Ji-Chai Lin

Hong Kong PolyU

Yu-Jane Liu

National Chengchi University (NCCU) - Department of Finance and Banking

Date Written: October 31, 2007

Abstract

Using an intraday transaction dataset with trader identity, we study foreign and domestic investors' trading activities and investment performance ahead of open-ending events of Taiwanese closed-end funds. Simply buying the funds at a discount and holding until open ending generates large abnormal returns. All information required to execute this strategy is made public, so the events set up natural experiments to examine how investors trade, holding constant access to information. Foreign investors are net buyers ahead of the open endings, more than doubling their positions and earning large abnormal returns. Domestic investors are net sellers while the discounts are still large, and forego large abnormal returns. The results suggest that investor sophistication in interpreting the same information is potentially an important determinant of investment performance differences across foreign and domestic investors.

Keywords: Closed-end Funds, Open-ending, Foreign Investors, Domestic Investors

JEL Classification: G15, G14

Suggested Citation

Chen, Li-Wen and Johnson, Shane A. and Lin, Ji-Chai and Liu, Yu-Jane, Information, Sophistication, and Foreign Versus Domestic Investors' Performance (October 31, 2007). Available at SSRN: https://ssrn.com/abstract=972462 or http://dx.doi.org/10.2139/ssrn.972462

Li-Wen Chen

University of Mississippi ( email )

902 Cumberland Rdg
Oxford, MS 38655
United States
662-281-1333 (Phone)

Shane A. Johnson (Contact Author)

Texas A&M University - Department of Finance ( email )

Mays School of Business
College Station, TX 77843-4218
United States
979-862-3318 (Phone)

Ji-Chai Lin

Hong Kong PolyU ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

Yu-Jane Liu

National Chengchi University (NCCU) - Department of Finance and Banking ( email )

64, Chih-nan Rd., Sec. 2, Mucha,
Taipei, 116
Taiwan ROC
(882)-2-2939-3091 ext. 81123 (Phone)

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