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Foreign institutional investment: Is governance quality at home important?

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

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.

Suggested Citation

  • Abdioglu, Nida & Khurshed, Arif & Stathopoulos, Konstantinos, 2013. "Foreign institutional investment: Is governance quality at home important?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 916-940.
  • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:916-940
    DOI: 10.1016/j.jimonfin.2012.08.001
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    Cited by:

    1. Asongu, Simplice & Nwachukwu, Jacinta, 2015. "Drivers of FDI in Fast Growing Developing Countries: Evidence from Bundling and Unbundling Governance," MPRA Paper 67294, University Library of Munich, Germany.
    2. Asongu, Simplice & Nguena, Christian, 2014. "Equitable and Sustainable Development of Foreign Land Acquisitions: what have we learnt on policy syndromes and implications?," MPRA Paper 56808, University Library of Munich, Germany.
    3. Simplice Anutechia Asongu & Christian Lambert Nguena, 2014. "Equitable and sustainable development of foreign land acquisitions: Lessons, Policies and Implications," AAYE Policy Research Working Paper Series 14_013, Association of African Young Economists, revised Aug 2014.
    4. repec:ecb:ecbwps:20141799 is not listed on IDEAS
    5. repec:eee:finsta:v:32:y:2017:i:c:p:17-29 is not listed on IDEAS
    6. Asongu, Simplice & Kodila-Tedika, Oasis, 2015. "Conditional determinants of FDI in fast emerging economies: an instrumental quantile regression approach," MPRA Paper 67297, University Library of Munich, Germany.
    7. Simplice Asongu & Enowbi Batuo & Vanessa Tchamyou, 2015. "Bundling Governance: Finance versus Institutions in Private Investment Promotion," Working Papers 15/051, African Governance and Development Institute..
    8. repec:ijb:journl:v:16:y:2017:i:1:p:49-74 is not listed on IDEAS
    9. Asamoah, Michael Effah & Adjasi, Charles K.D. & Alhassan, Abdul Latif, 2016. "Macroeconomic uncertainty, foreign direct investment and institutional quality: Evidence from Sub-Saharan Africa," Economic Systems, Elsevier, vol. 40(4), pages 612-621.
    10. Habib, Maurizio Michael & Floreani, Vincent Arthur, 2015. "Financial exposure to the euro area before and after the crisis: home bias and institutions at home," Working Paper Series 1799, European Central Bank.

    More about this item

    Keywords

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

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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