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

  • 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)

Registered author(s):

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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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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  8. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October.
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  15. Bohn, Henning & Tesar, Linda L, 1996. "U.S. Equity Investment in Foreign Markets: Portfolio Rebalancing or Return Chasing?," American Economic Review, American Economic Association, vol. 86(2), pages 77-81, May.
  16. Michael J. Brennan. and H. Henry Cao., 1997. "International Portfolio Investment Flows," Research Program in Finance Working Papers RPF-271, University of California at Berkeley.
  17. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers 691, Board of Governors of the Federal Reserve System (U.S.).
  18. Zoran Ivkovich & James Poterba & Scott Weisbenner, 2004. "Tax-Motivated Trading by Individual Investors," NBER Working Papers 10275, National Bureau of Economic Research, Inc.
  19. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
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  21. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
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