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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;
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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.

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

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