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Foreign Investments of U.S. Individual Investors: Causes and Consequences

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Author Info

  • Warren Bailey

    ()
    (Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853)

  • Alok Kumar

    ()
    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

  • David Ng

    ()
    (Department of Applied Economics and Management, Cornell University, Ithaca, New York 14853)

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Abstract

Using thousands of brokerage accounts of U.S. individual investors, we analyze the motivations and consequences of foreign equity investment. We find that diversification is not the only reason that investors trade foreign securities. While wealthier, more experienced investors enjoy an informational advantage and, thus, are more likely to invest overseas and experience good portfolio performance, other investors appear to venture abroad for the wrong reasons. In particular, behaviorally biased investors often underuse or misuse foreign equity securities and experience poor portfolio performance. Some investors appear to use foreign securities for speculation or to improve upon poor domestic portfolio performance.

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File URL: http://dx.doi.org/10.1287/mnsc.1070.0793
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 54 (2008)
Issue (Month): 3 (March)
Pages: 443-459

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Handle: RePEc:inm:ormnsc:v:54:y:2008:i:3:p:443-459

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Related research

Keywords: individual investors; behavioral biases; foreign investments; diversification; speculation;

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Cited by:
  1. Abreu, Margarida & Mendes, Victor & Santos, João A.C., 2011. "Home country bias: Does domestic experience help investors enter foreign markets?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2330-2340, September.
  2. Christelis, Dimitris & Georgarakos, Dimitris, 2013. "Investing at home and abroad: Different costs, different people?," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2069-2086.
  3. Baltzer, Markus & Stolper, Oscar & Walter, Andreas, 2013. "Is local bias a cross-border phenomenon? Evidence from individual investors’ international asset allocation," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2823-2835.
  4. Hoffmann, Arvid O.I. & Post, Thomas & Pennings, Joost M.E., 2013. "Individual investor perceptions and behavior during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 60-74.
  5. Hoechle, Daniel & Schmid, Markus & Zimmermann, Heinz, 2012. "Measuring Long-term Performance: a Regression Based Generalization of the Calendar Time Portfolio Approach," Working Papers on Finance 1216, University of St. Gallen, School of Finance.
  6. Bailey, Warren & Kumar, Alok & Ng, David, 2011. "Behavioral biases of mutual fund investors," Journal of Financial Economics, Elsevier, vol. 102(1), pages 1-27, October.

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