Financial Globalization, Governance, and the Evolution of the Home Bias

Bong‐chan Kho, René Stulz and Francis Warnock

Journal of Accounting Research, 2009, vol. 47, issue 2, 597-635

Abstract: We merge portfolio theories of home bias with corporate finance theories of insider ownership to create the optimal corporate ownership theory of the home bias. The theory has two components: (1) foreign portfolio investors exhibit a large home bias against countries with poor governance because their investment is limited by high optimal ownership by insiders (the “direct effect” of poor governance) and domestic monitoring shareholders (the “indirect effect”) in response to the governance and (2) foreign direct investors from “good governance” countries have a comparative advantage as insider monitors in “poor governance” countries, so that the relative importance of foreign direct investment is negatively related to the quality of governance. Using both country‐level data on U.S. investors' foreign investment allocations and Korean firm‐level data, we find empirical evidence supporting our optimal corporate ownership theory of the home bias.

Date: 2009
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https://doi.org/10.1111/j.1475-679X.2009.00323.x

Related works:
Working Paper: Financial globalization, governance, and the evolution of the home bias (2008)
Working Paper: Financial globalisation, governance and the evolution of the home bias (2006)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:47:y:2009:i:2:p:597-635

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