Information Asymmetries and Institutional Investor Mandates
38 Pages Posted: 14 Mar 2009
Date Written: March 2009
The literature on home bias and portfolio choice has identified both a foreign bias and an institutional investor bias. The first bias is characterized by foreign investors holding assets from larger firms than do domestic investors, whereas the second one goes one step further and state that this is actually a feature of institutional investors, independent of their nationality. Usually firm size is interpreted as a proxy for information asymmetries. This paper deepens the understanding of foreign holdings of institutional investors and these foreign and institutional investor biases. The hypothesis analyzed here is that there is actually heterogeneity in how information asymmetries affect the portfolio choice of institutional investors with different investment mandates. Our argument relies on managers with different mandates facing different costs and benefits in gathering and processing information. We focus the analysis on U.S. mutual funds with foreign investments. Hence, as the investment mandate becomes broader, informational costs for a specific country or region becomes higher and the benefits lower. Therefore, World or International fund managers would prefer to invest in firms less prone to information asymmetries than more specialized fund managers (from regional or emerging market funds). After controlling for transaction costs, liquidity, and other direct and indirect barriers to international capital flows, we find strong evidence in favor of our hypothesis. Mutual funds with broader mandates hold assets from larger and less leveraged firms if compared to funds with a more specialized focus. Our results suggest that informational frictions indeed have asymmetric effects on the portfolio choice of institutional investors with different mandates, being significantly more pronounced for investors with broader mandates.
Keywords: International Financial Markets, Portfolio Choice, Mutual Fund
JEL Classification: G11, G15, G23
Suggested Citation: Suggested Citation