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Financial Globalization, Governance, and the Evolution of the Home Bias
Author(s) -
KHO BONGCHAN,
STULZ RENÉ M.,
WARNOCK FRANCIS E.
Publication year - 2009
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2009.00323.x
Subject(s) - corporate governance , insider , foreign direct investment , shareholder , merge (version control) , business , monetary economics , portfolio , empirical evidence , finance , corporate finance , accounting , financial economics , financial system , economics , macroeconomics , philosophy , epistemology , information retrieval , political science , computer science , law
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: (1) 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 (2) 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.