Are Foreign Investors Smarter than Domestic Investors? Empirical Evidence from Indonesia

Abstract

The existence of different views on the superiority and dominance of foreign investor to domestic investor has been an interesting issue in behavioral finance. This study is aims at emperically comparing the advantages and disadvantages of the foreign investor to the domestic investor in term of information, behavior and performance. For this purpose, weekly stock trading data over the period 2014 – 2015 are utilized and testing using independent t-test. The study found that advantage of information and investor’s behavior between foreign and domestic investor did not show significant differences, but the trading performance showed a significant difference. Additionally, the study found that the absence of herding bias and investor competency in generating trade performance was due to their expertise in stock selection rather than market timing. These findings implied that both investors tended to use contrarian investment strategy than momentum strategy in trading them in the Indonesia Stock Exchange. Keywords—Investor behavior , Information advantage , Trading performance , Contrarian strategy.