Foreign equity flows and the “Size Bias”: Evidence from an emerging stock market

This paper examines foreign investors' equity-level transactions in an emerging stock market, the Istanbul Stock Exchange, for the period 1997-2008 to derive insights into the debate on information asymmetries between domestic and foreign investors and the home bias puzzle. The analysis suggests two important findings. First, foreign investors do not consider the market portfolio of domestic securities as predicted by standard theories of international portfolio diversification. Second, the firm's size and the expected return are central to explain foreign investors' equity trades. The results are consistent with models based upon the hypothesis of differential information between foreign and domestic investors.

► I examine foreign investors' firm-level transactions in the Istanbul stock exchange. ► Foreign investors prefer large capitalization stocks. ► Non-residents' purchases are highly correlated with returns on the host market. ► Results support the asymmetric information hypothesis between locals and foreigners.