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Information costs and home bias: an analysis of U.S. holdings of foreign equities

Alan Ahearne (), William L. Griever and Francis Warnock

No 691, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We aim to provide insight into the observed equity home bias phenomenon by analyzing the determinants of U.S. holdings of equities across a wide range of countries. In particular, we explore the role of information costs in determining the country distribution of U.S. investors' equity holdings using a comprehensive new data set on U.S. ownership of foreign stocks. We find that U.S. holdings of a country's equities are positively related to the share of that country's stock market that is listed on U.S. exchanges, even after controlling for capital controls, trade links, transaction costs, and historical risk-adjusted returns. We attribute this finding to the fact that foreign firms that list on U.S. exchanges are obliged to provide standardized, credible financial information, thereby reducing information costs incurred by U.S. investors. This obligation stems from U.S. investor protection regulations, which include stringent disclosure requirements, reconciliation of financial statements to U.S. standards, and an investor-friendly regulatory environment. Our results support the hypothesis that information costs are an important source of home bias: Foreign countries whose firms do not alleviate information costs by listing on a U.S. exchange are more severely underweighted in U.S. equity portfolios.

Keywords: Stock market; Investments, Foreign (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-ifn
Date: 2000
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Journal Article: Information costs and home bias: an analysis of US holdings of foreign equities (2004) Downloads
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