Pyrrhic diversification: Foreign institutional ownership and stock return sensitivity to the global financial cycle

Gene Ambrocio, Dien Giau Bui, Iftekhar Hasan and Chih-Yung Lin

No 2/2026, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: We demonstrate that foreign institutional ownership (FIO) is associated with stronger stock return sensitivity to the Global Financial Cycle (GFC), indicating greater global co-movement among stocks selected by FIOs compared to those not selected. We conjecture that this may be because (i) FIOs tend to pick ex-ante very similar firms when investing abroad, or (ii) FIO investments itself makes firms ex-post more similar and more sensitive to the GFC. We find evidence in support of both hypotheses: that the increased co-movement may be due to FIO's selecting more homogeneous firms and that the sensitivity to the GFC increases after FIO investment. However, we find no significant difference between firms that have longer exposure to FIO investors and those that have only recently obtained FIO investment. Our results indicate that diversification gains are left on the table when FIOs select firms to invest in.

Keywords: Foreign institutional ownership; Global Financial Cycle; co-movement; diversification gains (search for similar items in EconPapers)
JEL-codes: E44 F21 F30 G15 (search for similar items in EconPapers)
Date: 2026
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