Do Domestic Investors Have an Information Advantage? Evidence from Indonesia

Using transaction data from Indonesia, this paper shows that domestic investors have higher profits than foreign investors. In addition, clients of global brokerages have higher long-term and smaller medium (intramonth) and short (intraday) term profits than clients of local brokerages. This suggests that clients of local brokerages have a short-lived information advantage, but that clients of global brokerages are better at picking long-term winners. Finally, domestic clients of global brokerages have higher profits than foreign clients of global brokerages, suggesting that the combination of local information and global expertise leads to higher profits. THE QUESTION OF WHETHER DOMESTIC INVESTORS have better information than foreign investors is increasingly controversial. There are arguments that support both sides of the issue. One argument is that domestic investors have an advantage because information does not have to travel over physical, linguistic, or cultural distances. Conversely, foreign investors may have an information advantage because they have a significant amount of investment experience and expertise. Formal empirical evidence on this issue is also mixed. While Choe, Kho, and Stulz (2001) using Korean data, and Hau (2001a) using German data find that foreigners are at a disadvantage, Seasholes (2000) using Taiwanese data, Grinblatt and Keloharju (2000) using Finnish data, and Froot and Ramadorai (2001) using a cross section of 25 countries make a convincing case that foreigners do better than local investors. Furthermore, Kang and Stulz (1997) using Japanese data find no difference in the performance of domestic and foreign investors. This paper investigates information asymmetries in Indonesia using transaction data from the Jakarta Stock Exchange (JSX). The most critical aspects of the data are that every transaction record contains information on whether the buyer or seller was a domestic or foreign investor, and the names of the brokerage firms on both sides of the transaction.1 The identification of both ∗Tomáš Dvořák is from Union College, Department of Economics. I am grateful to Irmawati Amran and Kris Yarismal from the Jakarta Stock Exchange for their help in providing data and answering numerous questions, and to Mark Seasholes, Frank Warnock, and two anonymous referees for their helpful comments and suggestions. 1 To my knowledge, this data has never been explored in the context of information asymmetries. I found only two academic studies that used data from the JSX. Bonser-Neal, Linnan, and Neal (1999) use pre-1995 data to estimate transaction costs. Comerton-Forde (1999) looks at the impact of opening procedures on market efficiency on the Australian and Jakarta Stock Exchanges.