Financial globalisation, governance and the evolution of the home bias

Bong-Chan Kho, René Stulz and Francis Warnock

No 220, BIS Working Papers from Bank for International Settlements

Abstract: Despite the disappearance of formal barriers to international investment across countries, we find that the average home bias of US 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 capitalisation. 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. We find that the home bias of US investors decreased the most towards countries in which the ownership by corporate insiders is low and countries in which ownership by corporate insiders fell. Using firm-level data for Korea, we find that portfolio equity investment by foreign investors in Korean firms is inversely related to insider ownership and that the firms that attract the most foreign portfolio equity investment are large firms with dispersed ownership.

Keywords: financial globalisation; home bias; corporate governance (search for similar items in EconPapers)
JEL-codes: F36 G34 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2006-12
New Economics Papers: this item is included in nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.bis.org/publ/work220.pdf Full PDF document (application/pdf)
http://www.bis.org/publ/work220.htm (text/html)

Related works:
Journal Article: Financial Globalization, Governance, and the Evolution of the Home Bias (2009)
Working Paper: Financial globalization, governance, and the evolution of the home bias (2008)
Working Paper: Financial Globalization, Governance, and the Evolution of the Home Bias (2006)
Working Paper: Financial Globalization, Governance, and the Evolution of the Home Bias (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:220

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler ().