Hostname: page-component-cb9f654ff-p5m67 Total loading time: 0 Render date: 2025-08-19T23:46:58.540Z Has data issue: false hasContentIssue false
  • English
  • Français

Corporate Governance and the Home Bias

Published online by Cambridge University Press:  06 April 2009

Magnus Dahlquist ,
Lee Pinkowitz ,
René M. Stulz  and
Rohan Williamson
Magnus Dahlquist
Affiliation:
magnus.dahlquist@sifr.org, Stockholm Institute for Financial Research, Wallingatan 11, Stockholm, SE-111 60, Sweden;
Lee Pinkowitz
Affiliation:
pinkowitz@msb.eduMcDonough School of Business, Georgetown University, G-04 Old North, Washington, DC 20057
René M. Stulz
Affiliation:
stulz@cob.osu.edu, Fisher College of Business, Ohio State University, 2100 Neil Ave, Columbus, OH, 43210.
Rohan Williamson
Affiliation:
williarg@georgetown.edu, McDonough School of Business, Georgetown University, G-04 Old North, Washington, DC 20057;
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper shows that there is a close relation between corporate governance and the portfolios held by investors. Most firms in countries with poor investor protection are controlled by large shareholders, so that only a fraction of the shares issued by firms in these countries can be freely traded and held by portfolio investors. We show that the prevalence of closely-held firms in most countries helps explain why these countries exhibit a home bias in share holdings and why U.S. investors underweight foreign countries in their portfolios. We construct an estimate of the world portfolio of shares available to investors who are not controlling shareholders (the world float portfolio). The world float portfolio differs sharply from the world market portfolio. In regressions explaining the portfolio weights of U.S. investors, the world float portfolio has a positive significant coefficient but the world market portfolio has no additional explanatory power. This result holds when we control for country characteristics. An analysis of foreign investor holdings at the firm level for Sweden confirms the importance of the float portfolio as a determinant of these holdings.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 1 , March 2003 , pp. 87 - 110
Copyright
Copyright © School of Business Administration, University of Washington 2003

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Ahearne, A. G.; Griever, W. L.; and Warnock, F. E.. “Information Costs and Home Bias: An Analysis of U.S. Holdings of Foreign Equities”. Working Paper 691, Reserve Board, International Finance Division, Washington, D.C. (2001).Google Scholar
Beck, T.; Demirgüç-Kunt, A.; and Levine, R.. “A New Database on Financial Development and Structure”. Unpubl. Paper, Univ. of Minnesota (1999).Google Scholar
Bhattacharya, U., and Daouk, H.. “The World Price of Insider Trading.” Journal of Finance, 57 (2002), 75–108.CrossRefGoogle Scholar
Burkart, M.; Gromb, D.; and Panunzi, F.. “Large Shareholders, Monitoring, and Fiduciary Duty”. Quarterly Journal of Economics, 112 (1998), 693–728.CrossRefGoogle Scholar
Cheffins, B. R. “Corporate Law and Ownership Structure: A Darwinian Link?” Unpubl. Working Paper, Univ. of Cambridge (2002).CrossRefGoogle Scholar
Claessens, S.; Djankov, S.; Fan, J.; and Lang, L.. “Disentangling the Incentive and Entrenchment Effects of Large Shareholdings”. Journal of Finance, 57 (2002), 2741–2771.CrossRefGoogle Scholar
Cronqvist, H., and Nilsson, M.. “Agency Costs of Controlling Minority Shareholders”. Journal of Financial and Quantitative Analysis (forthcoming 2003).CrossRefGoogle Scholar
Dahlquist, M., and Robertsson, G.. “Direct Foreign Ownership, Institutional Investors, and Firm Characteristics”. Journal of Financial Economics, 59 (2001), 413–440.CrossRefGoogle Scholar
Doidge, C. “Do Changes in Laws Matter for Ownership and Control? Evidence from Emerging Markets”. Working Paper, Ohio State Univ. (2001).Google Scholar
Dyck, A., and Zingales, L.. “Why are Private Benefits of Control So Large in Certain Countries and What Effect Does This Have on Their Financial Development?” Working Paper, Univ. of Chicago (2001).Google Scholar
Giannetti, M., and Simonov, A.. “Which Investors Fear Expropriation?” Working Paper, Stockholm School of Economics, Stockholm, Sweden (2002).Google Scholar
Johnson, S.; Porta, R. La; Lopez-de-Silanes, F.; and Shleifer, A.. “Tunneling”. American Economic Review, 90 (2000), 22–27.CrossRefGoogle Scholar
Kang, J., and Stulz, R. M.. “Why is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan”. Journal of Financial Economics, 46 (1997), 3–28.CrossRefGoogle Scholar
Karolyi, A., and Stulz, R. M.. “Are Financial Assets Priced Locally or Globally?” In Handbook of the Economics of Finance, Constantinides, G., Harris, M., and Stulz, R., eds. Amsterdam, The Netherlands: North-Holland (forthcoming 2003).Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Corporate Ownership around the World”. Journal of Finance, 54 (1999), 471–517.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Law and Finance”. Journal of Political Economy, 106 (1998), 1113–1155.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Investor Protection and Corporate Governance”. Journal of Financial Economics, 58 (2000), 3–27.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Investor Protection and Corporate Valuation”. Journal of Finance, 57 (2002), 1147–1170.CrossRefGoogle Scholar
Leland, H. E., and Pyle, D. H.. “Informational Asymmetries, Financial Structure, and Financial Intermediation”. Journal of Finance, 32 (1977), 371–387.CrossRefGoogle Scholar
Lewis, K. K. “Trying to Explain Home Bias in Equities and Consumption”. Journal of Economic Literature, 37 (1999), 571–608.CrossRefGoogle Scholar
Martin, P., and Rey, H.. “Financial Super-Markets: Size Matters for Asset Trade”. NBER Working Paper 8476, NBER, Cambridge, MA (2001).CrossRefGoogle Scholar
Nenova, T. “The Value of Corporate Votes and Control Benefits: Cross-Country Analysis.” Journal of Financial Economics (forthcoming 2003).CrossRefGoogle Scholar
Roe, M. J. “Corporate Law's Limits”. Journal of Legal Studies, 31 (2002), 233–272.CrossRefGoogle Scholar
Shleifer, A., and Wolfenzon, D.. “Investor Protection and Equity Markets.” Journal of Financial Economics, 66 (2002), 3–27.CrossRefGoogle Scholar
Sundin, A., and Sundqvist, S.-I.. “Owners and Power in Sweden's Listed Companies 1997”. SIS Āgarservice AB, Stockholm (1998).Google Scholar