Journal of Financial and Quantitative Analysis

Research Article

Corporate Governance and the Home Bias

Magnus Dahlquista1, Lee Pinkowitza2, René M. Stulza3 and Rohan Williamsona4

a1, Stockholm Institute for Financial Research, Wallingatan 11, Stockholm, SE-111 60, Sweden;

a2 McDonough School of Business, Georgetown University, G-04 Old North, Washington, DC 20057

a3, Fisher College of Business, Ohio State University, 2100 Neil Ave, Columbus, OH, 43210.

a4, McDonough School of Business, Georgetown University, G-04 Old North, Washington, DC 20057;


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.