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Financial globalization, governance, and the evolution of the home bias

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  • Financial globalization, governance, and the evolution of the home bias
  • Bong-Chan Kho, René M. Stulz, Francis E. Warnock
  • National Bureau of Economic Research


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Title Financial globalization, governance, and the evolution of the home bias
Similar Titles
Material Type Reports
Author(English)

Bong-Chan Kho, René M. Stulz, Francis E. Warnock

Publisher

Cambridge:National Bureau of Economic Research

Date 2006-07
Series Title; No NBER Working Paper Series / 12389
Pages 53
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Original Format pdf
Subject Industry and Technology < Entrepreneurship
Holding National Bureau of Economic Research

Abstract

Despite the disappearance of formal barriers to international investment across countries, we find that the average home bias of U.S. investors towards the 46 countries with the largest equity markets did not fall from 1994 to 2004 when countries are equally weighted but fell when countries are weighted by market capitalization. This evidence is inconsistent with portfolio theory explanations of the home bias, but is consistent with what we call the optimal insider ownership theory of the home bias. Since foreign investors can only own shares not held by insiders, there will be a large home bias towards countries in which insiders own large stakes in corporations. Consequently, for the home bias to fall substantially, insider ownership has to fall in countries where it is high. Poor governance leads to concentrated insider ownership, so that governance improvements make it possible for corporate ownership to become more dispersed and for the home bias to fall. (The rest omitted)