Anchoring effect on foreign institutional investors’ momentum trading behavior: Evidence from the Taiwan stock market

• This study documents an anchoring effect on foreign institutional investors’ trading decision.
• Foreign institutional investors’ momentum behavior is anchored by prior foreign ownership.
• In some cases, momentum profitability suffers because of the anchoring effect.

On Taiwan's stock market, foreign institutional investors hold over one-third of the total market value and have enjoyed remarkable returns on their investments. Hence, it is important to investigate the trading behavior of foreign institutional investors. Previous studies have found that foreign institutional investors are momentum traders. This study documents a cognitive bias – anchoring effect – on foreign institutional investors’ trading decisions. Moreover, we document that foreign institutional investors’ momentum behavior is influenced (anchored) by prior foreign ownership (anchor). We also show that foreign investors’ momentum behavior is strengthened when prior foreign ownership is high. However, the anchoring effect cannot improve momentum profitability. In some cases, momentum profitability suffers because of the anchoring effect.