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Authors:

• Takeshi YAMADA
  Hong Kong University of Science and Technology

• Kee-Hong BAE
  Korea University

• Keiichi ITO

The interaction between foreign and domestic investors, particularly that between foreigners and domestic financial institutions, represents one of the most important patterns of trade on the Tokyo Stock Exchange during the 1990s. We find that foreign investors trade in directions opposite to domestic investors and to exploit the institutional differences between their home and Japanese markets. Domestic institutions sell shares to realize capital gains on their portfolio holdings near the fiscal year-end. Because of this practice, domestic institutions' timing performance is hampered and the implicit cost of trading increases. Foreigners exploit this opportunity since they need not follow the Japanese corporate accounting rule.