This paper uses the perfect market segmentation setting in China's stock market to compare the information content of the stock trades of domestic and foreign investors. We study 76 firms that issue both A-shares (for domestic investors) and B-shares (for foreign investors) and compare the price discovery role of the two segmented markets in China. Before Feb 19, 2001, the A-share market led the B-share market in price discovery, as the signed volume and quote revision of the A-share market had strong predictive ability for B-share quote returns, but not vice versa. After Feb 19, 2001, because some domestic investors were allowed to invest in the B-share market, we find evidence for a reverse causality from the B-share to the A-share market. Nevertheless, the Hasbrouck (1995) information share analysis reveals that A-shares continue to dominate the price discovery process.

We examine the portfolio rebalancing, measured by the equity churn rate, of mutual funds from 29 countries based on annual stockholdings over the 1999-2004 period. Our results show that the funds trade more often the stocks of companies located in countries that are less developed, have weaker investor protection, have lower information disclosure standards and are less familiar to the fund managers. The negative relationship between churn rates in foreign securities and quality of information disclosure or degree of familiarity is consistent with the hypothesis that the investors rebalance more often the holdings of stocks about which they know less and are less familiar with. Consistent with the behavioral bias of quot;limited attentionquot;, fund managers rebalance more often stocks in foreign markets that performed well. This bias is exacerbated when the fund managers are less familiar and less informed with those markets. Our findings contribute to a better understanding regarding how investors trade foreign shares, and shed some light on the factors that explain cross-border portfolio flows.