Journal of Banking & Finance 
Volume 34, Issue 12, December 2010, Pages 2886–2896 

  

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Hyung Cheol Kang (a), , Dong Wook Lee (b), , , Kyung Suh Park (b),
a Department of Business Administration, The University of Seoul, Seoul 130-743, Republic of Korea 
b Korea University Business School, Seoul 130-701, Republic of Korea 
http://doi.org/10.1016/j.jbankfin.2009.11.020 



Abstract 

This paper proposes an investor heterogeneity approach to the different domestic stock holdings between domestic and foreign investors. Specifically, we hypothesize that domestic and foreign investors evaluate domestic stocks via different models and thus arrive at different valuations for them; consequently, the two investor groups are attracted to different sets of domestic stocks. Using panel data from Korea, we find strong support for our hypothesis. More precisely, we find that the foreign ownership of a stock increases with foreigners’ valuation for the stock in excess of that of domestic investors. As we control for various firm characteristics known to be correlated with foreign ownership, our results indicate that the valuation difference between domestic and foreign investors can help explain the allocation of domestic stocks between the two groups over and above the existing explanations. 

JEL classification 

G11; G12; G15 

Keywords 

Investor heterogeneity; 
Foreign investors; 
Valuation difference; 
Domestic stock holdings"