Domestic and Foreign-Owned Firms

Another contribution factor to differentiate between foreign and domestic funds behaviors are claimed by Ferreira, Matos (2008), they find that stocks with recent positive stock return performance seem to be more attractive for foreign funds to invest in, but domestic investors display a contrast behavior on this phenomenon. To be more specific, Firms with large Rate of Return on Common Stockholders’ Equity (ROE) are more attract foreign investment.

By contrast, domestic funds are more likely to invest firms with smaller ROE. In addition, As Covirg,Lau and Ng(2006) have considered, the development of stock market and familiarity variable not only play a pivotal role in the domestic share preference but also have a vital but asymmetric influence upon the foreign biases. Specifically, the better developed the host country is, company with the larger in market capitalization and the less transaction cost of the country, the large proportion of foreign investors budget will be invest in this market but domestic investors will invest less.

Correspondingly, when a host country shares the diverse language with the rest of the world and are distant from other countries, the result will be different from former, which means the domestic investors will invest more in the market than foreign investors. The evidence indicates that if a host country is more developed and not far away from the rest of the world, it will decrease the cost of deadweights, which make both foreign and domestic investors could benefit from investing.

Last but not least, there is a distinct differential behavior between foreign and domestic managers in terms of firm visibility. Covirg, Lau and Ng (2006) investigate foreign and domestic investment fund holdings across of 11 developed countries and find that domestic investors are prone to put majority of their funds in their local stock, but foreign investors prefer to invest in different stock. That is because compare with domestic investors, foreign investors are information disadvantages, which lead them are eager to invest in stocks they are familiar with. This is associated with the number of analysts following a stock, size of foreign sales, index membership and stocks with foreign listing.

For example, firms have great visibility and stocks are widely known in the world. Ferreiraa, Matos(2008) also conclude firm’s visibility in many ways such as add vary number of analysts covering a firm, give the proportion of foreign sales and a proxy which is use for investors to get the level of information more early. As a result, they find that the firm’s visibility seem to be more attractive to foreign investors, but not domestic investors. Ferreira, Matos (2008) go on to say that domestic investors favor firms that have high dividend yields stocks and stocks with higher market-to-book equity,which is opposite to foreigners’ investment behavior.

Covirg, Lau and Ng(2006)expands that high dividend yields is used to survey income appreciation and weather firms have high growth potential or low financial are relate to weather it have high market-to-book equity ratios or not. The investigate data reveals the tendency of the domestic funds are concentrating in shares of firms with high income appreciation and particularly those with high potential growth and low financial distress. Meanwhile, foreign managers are also more inclined to concentrate in stocks of firms with large market-capitalization. This finding is consistent with Dahlquist and Robertsson (2001), who consider that foreigners have a preference for firms paying low dividends. The reason they tend to averse to stocks with high dividend yields is owing to tax withholding concerns.

All in all, in this paper, I focus on Existing studies identify several distinctive differences between the preferences of foreign and domestic funds across both developed and developing countries. Though the results show that Domestic funds always allocate money to firms with high market-to-book equity ratios, large dividend yields and high turnover, while foreign funds generally concentrate more in shares of in firms with larger market capitalization and high turnover. Moreover, foreign funds are keen on firms that have great visibility and worldwide visibility but that play a weaker role in determining domestic investment decisions.

Bibliography

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Covrig, V., Lau, S. T and Ng, L. (2006) ‘Do domestic and foreign fund managers have similar preferences for stock characteristics? A cross-country analysis’, Journal of International Business Studies, 37(3), pp. 407-429

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Chan, K., Covrig, V., and Ng, L. (2005) ‘What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide’, Journal of Finance, 60(3), pp.1495- 1534.

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