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Foreign institutional investment: Is governance quality at home important?

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  • Abdioglu, Nida
  • Khurshed, Arif
  • Stathopoulos, Konstantinos
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    Abstract

    This paper examines the investment preferences of foreign institutional investors investing in the U.S. market. We analyse both firm and country-level determinants that influence the foreign institutional investors' allocation choices. At the country level, we find that the governance quality in a foreign institutional investor's home country is a determinant of their decision to invest in the U.S. market. Our findings indicate that investors who come from countries with governance setups similar to that of the U.S. invest more in the United States. The investment levels though, are more pronounced for countries with governance setups just below that of the U.S. Our results are consistent with both the ‘flight to quality’ and ‘familiarity’ arguments, and help reconcile prior contradictory empirical evidence. At the firm level, we present unequivocal evidence in favour of the familiarity argument. Foreign institutional investors domiciled in countries with high governance quality prefer to invest in U.S. firms with high corporate governance quality. This effect is primarily driven by grey (non-monitoring) institutional investors.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0261560612001532
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 32 (2013)
    Issue (Month): C ()
    Pages: 916-940

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    Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:916-940

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: G11; G20; G38; Foreign institutional investment; Home country effect; Flight to quality; Familiarity argument;

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    Cited by:
    1. Asongu Simplice & Nguena Christian, 2014. "Equitable and Sustainable Development of Foreign Land Acquisitions: what have we learnt on policy syndromes and implications?," Working Papers 14/001, African Governance and Development Institute..

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