Investment Preference and Strategies of Foreign Institutional Investors Across Different Industries in Taiwan

Abstract

This paper investigates the investment preference of foreign institutional investors across different industries in Taiwanese stock market. By employing the idea of Fama and French (1992) three-factor model with investment strategy, the investment preference is a function of beta value, company size, book-market ratio and investment strategy. Our empirical results find that foreign institutional investors in all five industries adopt momentum strategies in their investment preference. Next, in each industry, investment preference has a long-run equilibrium relationship with beta value, company size, book-market ratio, and investment strategy. Moreover, in the electronic, financial, and steel industries, foreign institutional investors' investment preference has corrective power in the short-run. Further, the results of the Granger causality test reveal that the investment preference has a uni-directional leading relationship with beta value in the financial and textile industries. While in case of the steel industry, investment preference and beta value have a bi-directional causal feedback relationship. Industries where company size leads investment preference include electronics, finance, and steel. Book-market ratio leads investment preference only in the textile industry. Generally speaking, in each industry, company size is among the predominant factors that foreign institutional investors take into account when making decisions. The influences of beta value and investment strategy on investment preference do not appear significant. That is, the investment strategy under consideration does not make a difference for investment preference.