Payout Policies and Foreign Investor Herding

We study the influence of herding behaviors of foreign investors on South Korean financial market. Using Korean daily transaction data for foreign investors compared with domestic institutional investors, we show that herding behaviors exist among foreign investors. Our findings suggest that firms’ payout policies affect their herding activities. How foreign investors react to dividend increase and initiation differ. We find that foreign investors move oppositely with domestic institutional investors. This is not affected by the payout polices. Our empirical evidence implies the existence of information asymmetry between foreign and domestic institutional investors. This information asymmetry is mitigated with firm-level dividend initiation but not dividend increase.