Domestic Investor Protection and Foreign Portfolio Investment

Abstract

This paper investigates the impact of domestic investor protection on equity cross-border investment. We bring to light a lower sensitivity of foreign investment to destination countries' corporate governance for those investors enjoying a higher degree of investor protection at home. This evidence is consistent with the conjecture that high standards of corporate governance at home make investors less familiar with problems related to weak investor protection and then less sensitive to this issue when choosing the composition of their foreign portfolio. As an ensuing perverse effect, assets issued by well protected foreign countries are those more severely penalized in portfolios held by investing countries featuring stronger investor protection.

Keywords: International portfolio investments, Investor Protection Rights, Home bias

JEL Classification: G11, G15, G30