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Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan

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  • Jun-Koo Kang
  • Rene M. Stulz

Abstract

This paper uses data on foreign stock ownership in Japan from 1975 to 1991 to examine the determinants of the home bias in portfolio holdings. Existing models of international portfolio choice predicting that foreign investors hold national market portfolios or portfolios tilted towards high expected return stocks are inconsistent with the evidence provided in this paper. We document that foreign investors overweight shares of firms in manufacturing industries, large firms, firms with good accounting performance, firms with low unsystematic risk, and firms with low leverage. Controlling for size, there is evidence that small firms that export more have greater foreign ownership. Foreign investors do not perform significantly worse than if they held the Japanese market portfolio, however. After controlling for firm size, there is no evidence that foreign ownership is related to expected returns of shares. We show that a model with size-based informational asymmetries and deadweight costs can yield asset allocations consistent with our evidence.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5166.

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Date of creation: Jul 1995
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Publication status: published as Journal of Financial Economics, Vol. 46, no. 1 (October 1997): 3-28.
Handle: RePEc:nbr:nberwo:5166

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  1. Kang, Jun-Koo & Kim, Yong-Cheol & Park, Kyung-Joo & Stulz, René M., 1995. "An Analysis of the Wealth Effects of Japanese Offshore Dollar-Denominated Convertible and Warrant Bond Issues," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 30(02), pages 257-270, June.
  2. Baxter, Marianne & Jermann, Urban J, 1997. "The International Diversification Puzzle Is Worse Than You Think," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 170-80, March.
  3. Robert J. Shiller & Fumiko Kon-Ya & Yoshiro Tsutsui, 1991. "Speculative Behavior in the Stock Markets: Evidence from the United States and Japan," NBER Working Papers 3613, National Bureau of Economic Research, Inc.
  4. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 95(1), pages 97-109.
  5. Dothan, Michael U & Feldman, David, 1986. " Equilibrium Interest Rates and Multiperiod Bonds in a Partially Observable Economy," Journal of Finance, American Finance Association, American Finance Association, vol. 41(2), pages 369-82, June.
  6. Baxter, Marianne & Jermann, Urban J. & King, Robert G., 1998. "Nontraded goods, nontraded factors, and international non-diversification," Journal of International Economics, Elsevier, Elsevier, vol. 44(2), pages 211-229, April.
  7. French, Kenneth R. & Poterba, James M., 1990. "Japanese and U.S. cross-border common stock investments," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 476-493, December.
  8. Rudd, Andrew, 1977. "A note on qualitative results for investment proportions," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 259-263, November.
  9. Detemple, Jerome B, 1986. " Asset Pricing in a Production Economy with Incomplete Information," Journal of Finance, American Finance Association, American Finance Association, vol. 41(2), pages 383-91, June.
  10. Fuller, Wayne A. & Battese, George E., 1974. "Estimation of linear models with crossed-error structure," Journal of Econometrics, Elsevier, Elsevier, vol. 2(1), pages 67-78, May.
  11. Williams, Joseph T., 1977. "Capital asset prices with heterogeneous beliefs," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 219-239, November.
  12. Roll, Richard & Ross, Stephen A., 1977. "Comments on qualitative results for investment proportions," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 265-268, November.
  13. Uppal, Raman, 1993. " A General Equilibrium Model of International Portfolio Choice," Journal of Finance, American Finance Association, American Finance Association, vol. 48(2), pages 529-53, June.
  14. Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  15. Rene M. Stulz, 1994. "International Portfolio Choice and Asset Pricing: An Integrative Survey," NBER Working Papers 4645, National Bureau of Economic Research, Inc.
  16. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(4), pages 467-492, August.
  17. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, American Finance Association, vol. 36(4), pages 923-34, September.
  18. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
  19. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  20. Gennotte, Gerard, 1986. " Optimal Portfolio Choice under Incomplete Information," Journal of Finance, American Finance Association, American Finance Association, vol. 41(3), pages 733-46, July.
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