Performance of Institutional and Foreign Investors in the Japanese and Korean Stock Markets

The rise of institutional investors in stock ownership is a common phenomenon observed around the world, and the importance and influence of foreign investors is also increasing, especially in Asian markets. This study examines the characteristics of institutional and foreign investor stock ownership, and the stock price performance according to their ownership for two major Asian markets, Japan and Korea. Overall, foreign investors show more apparent preference for stocks with large capitalization and low book-to-market ratio than do institutional investors. In Korea, foreign investors also show preference for stocks with a high return-on-equity. The analysis of abnormal returns using the Fama-French three-factor model shows that stocks with simultaneously high institutional and foreign ownership significantly outperform those with low ownership of that type. The differences in abnormal returns are more evident for foreign ownership portfolios than for institutional ownership portfolios, especially in Korea. If we consider either institutional or foreign investors, the differences in abnormal returns remain still significant in Korea, but not in Japan. Both institutional investors' incentive for stock holding and the extent of stock market efficiency would be the possible explanations for the different results between Japan and Korea