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Financial Globalization, Governance, and the Evolution of the Home Bias

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  • BONG-CHAN KHO
  • RENÉ M. STULZ
  • FRANCIS E. WARNOCK

Abstract

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. Copyright (c), University of Chicago on behalf of the Institute of Professional Accounting, 2009.

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  • Bong-Chan Kho & René M. Stulz & Francis E. Warnock, 2009. "Financial Globalization, Governance, and the Evolution of the Home Bias," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 597-635, May.
  • Handle: RePEc:bla:joares:v:47:y:2009:i:2:p:597-635
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    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F30 - International Economics - - International Finance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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