The Value of Clean Hands: Public Policy and International Asset Allocation

32 Pages Posted: 6 Mar 2008

See all articles by Piet Sercu

Piet Sercu

FEB at KU Leuven

Rosanne Vanpee

KU Leuven Faculty of Economics and Business

Date Written: February 4, 2008

Abstract

Despite of the intuitive idea that corporate governance and transparency are crucial for a country's international appeal, foreign portfolio investors appear to care first and foremost about transparency, predictability and honesty in governments. This is, at least, what our analysis of international portfolio holdings implies. Our estimates further indicate that (i) a feasible improvement of government corruption and especially institutional quality can trigger an economically substantial rise in foreign interest for the stocks of that country; and (ii) an amelioration in country-level governance variables creates significantly higher effects on foreign equity demand than an improvement in traditional macroeconomic policy indicators.

Keywords: international portfolio diversification, information asymmetries, home bias

JEL Classification: G11, G15, F36

Suggested Citation

Sercu, Piet M. F. A. and Vanpee, Rosanne, The Value of Clean Hands: Public Policy and International Asset Allocation (February 4, 2008). EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1102424 or http://dx.doi.org/10.2139/ssrn.1102424

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
Belgium
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

Rosanne Vanpee (Contact Author)

KU Leuven Faculty of Economics and Business ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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