Financial Globalization, Governance, and the Evolution of the Home Bias

49 Pages Posted: 29 Apr 2009

See all articles by Bong-Chan Kho

Bong-Chan Kho

Seoul National University, Business School

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Francis E. Warnock

University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)

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Abstract

We merge portfolio theories of home bias with corporate finance theories of insider ownership to create the optimal corporate ownership theory of the home bias. The theory has two components: (i) foreign portfolio investors exhibit a large home bias against countries with poor governance because their investment is limited by high optimal ownership by insiders (the “direct effect” of poor governance) and domestic monitoring shareholders (the “indirect effect”) in response to the governance, and (ii) foreign direct investors from “good governance” countries have a comparative advantage as insider monitors in “poor governance” countries, so that the relative importance of foreign direct investment is negatively related to the quality of governance. Using both country-level data on U.S. investors' foreign investment allocations and Korean firm-level data, we find empirical evidence supporting our optimal corporate ownership theory of the home bias.

Suggested Citation

Kho, Bong-Chan and Stulz, Rene M. and Warnock, Francis E., Financial Globalization, Governance, and the Evolution of the Home Bias. Available at SSRN: https://ssrn.com/abstract=1394633 or http://dx.doi.org/10.1111/j.1475-679X.2009.00323.x

Bong-Chan Kho (Contact Author)

Seoul National University, Business School ( email )

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Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

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Francis E. Warnock

University of Virginia - Darden Business School ( email )

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