Financial globalisation, governance and the evolution of the home bias
By: by Bong-Chan Kho, René M. Stulz and Francis E. Warnock
Contributors: Stulz, René M.; Warnock, Francis E.; Bank for International Settlements. Monetary and Economic Department
Series: BIS working papers -- no. 220
Publisher: Bank for International Settlements
Published: 2006
Place of publication: Basel, Switzerland
Language: eng
Format: [electronic resource] /
Description: 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
Notes: Title from PDF file (viewed on Jan. 4, 2007).

"Monetary and Economic Department."

"December 2006."

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