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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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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
Note: AP CF
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  17. Rene M. Stulz, 1994. "International Portfolio Choice and Asset Pricing: An Integrative Survey," NBER Working Papers 4645, National Bureau of Economic Research, Inc.
  18. 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, vol. 30(02), pages 257-270, June.
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