Information costs and home bias: an analysis of US holdings of foreign equities

By Alan G. Ahearne, William L. Griever, F. Warnock. 2004

763 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/16967b971cbf391fb637f8b9ead28bfdca073a6c

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Citations in the corpus

The Overseas Listing Decision: New Evidence of Proximity Preference (2004, neutral): “(2003), and Ahearne et al. (2001) find that foreign firm listings in the U.”
Information Immobility and the Home Bias Puzzle (2009, neutral): “Given posterior beliefs about asset payoffs f ∼ N(μ̂, Σ̂), each investor’s portfolio choice q maximizes (1), subject to the budget constraint (2);”
Home Bias in Global Bond and Equity Markets: The Role of Real Exchange Rate Volatility (2007, background): “…focuses on the effect of transaction and information costs on international portfolio positions, as e.g. in Tesar and Werner (1995), Warnock (2001), Ahearne et al. (2004), Cai and Warnock (2004), Chan et al. (2005) and Daude and Fratzscher (2006).3 Various recent empirical studies have challenged…”
The Flight Home Effect: Evidence from the Syndicated Loan Market During Financial Crises (2012, background): “…offers alternative explanations for the existence of a home bias, including informational advantages for domestic investors (Brennan and Cao, 1997; Ahearne et al., 2004; Portes and Rey, 2005; Kang and Stulz, 1997; Van Nieuwerburgh and Veldkamp, 2009; Andrade and Chhaochharia, 2010) and biases…”
International Asset Allocation Under Regime Switching, Skew and Kurtosis Preferences (2005, background): “Provided that (i) the Taylor series in (2) converges; (ii) the distribution of wealth is uniquely determined by its moments; and (iii) the order of sums and integrals can be exchanged, the expansion in (2) extends to the expected utility functional:”
Roll Out the Red Carpet and They Will Come: Investment Promotion and FDI Inflows† (2011, background): “Information asymmetries between domestic and foreign investors have been put forward as a possible explanation for home bias, the tendency of investors to invest less in foreign equities relative to the prediction of a portfolio choice model (Stulz, 1981; Ahearne et al., 2004).”
Exporting Sovereign Stress: Evidence from Syndicated Bank Lending during the Euro Area Sovereign Debt Crisis (2015, background): “Angeloni and Wolff (2012) find that European banks’ stock market performance was impacted by exposures to GIIPS sovereign debt.”
Subjective measures of risk aversion, fixed costs, and portfolio choice (2011, neutral): “The consumer wants to maximize the expectation of end of period utility subject to (1) by choosing α optimally.”
Information and capital flows: The determinants of transactions in financial assets (2001, neutral): “Pagano et al. (1999) and Ahearne et al. (2000) underline the importance of the informational barriers constituted by di!erent national accounting standards and practices.”