Foreign investor trading and information asymmetry: evidence from a leading emerging market

Abstract

This article examines the influence of foreign investor trading on information asymmetry in the Korean stock market, a representative emerging market characterized by a high level of information asymmetry between corporate insiders and outsiders, and among investors. We find a significantly positive relationship between foreign investor trading and the consequent bid-ask spread - the latter of which is considered as a proxy for the degree of information asymmetry - on both daily and weekly bases. Our results indicate that active foreign investor trading tends to exacerbate informational variation.