Information Immobility and Foreign Portfolio Investment

Review of Financial Studies, Forthcoming

40 Pages Posted: 8 Oct 2009

See all articles by Sandro C. Andrade

Sandro C. Andrade

University of Miami - Department of Finance

Vidhi Chhaochharia

University of Miami - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2009

Abstract

We examine how residents of the United States allocate their stock portfolios internationally. We find that a large U.S. Foreign Direct Investment (FDI) position in a destination country in 1990 is associated with a relatively large stock portfolio position in that country in the 2001-2006 period. Moreover, a change in the U.S. FDI position from 1980 to 1990 helps predict the change in the U.S. FPI position from 1994 to 2006. These results are rationalized by Van Nieuwerburgh and Veldkamp's (2009) equilibrium model of learning and portfolio choice under an information processing constraint. FDI establishes marginal differences in the endowments of information about different countries, which later translate into differences in stock portfolio holdings. We control for cross-country differences in capital controls, proximity along different dimensions, corporate governance, and economic and capital market development. Our results also hold for the G6 countries collectively.

Keywords: International Portfolio Choice, FDI, Information Asymmetry

JEL Classification: F21, F36, G11

Suggested Citation

Andrade, Sandro C. and Chhaochharia, Vidhi, Information Immobility and Foreign Portfolio Investment (August 24, 2009). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1485529

Sandro C. Andrade (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://moya.bus.miami.edu/~sandrade/

Vidhi Chhaochharia

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

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