Information Acquisition, International Under-Diversification and Portfolio Performance of Institutional Investors
Midwest Finance Association 2012 Annual Meetings Paper
57 Pages Posted: 16 Sep 2011 Last revised: 5 Sep 2012
Date Written: January 10, 2012
We test whether 1) institutional investors with concentrated international holdings outperform internationally diversified investors, and 2) foreign investors with information advantage, measured by cultural and geographic proximity to the target market, outperform other foreign investors. Using the United States as a target market, we document that investors concentrated in US securities do not outperform other investors. This result contradicts the idea that internationally under-diversified portfolios are mean-variance efficient due to the benefits of economies of scale and specialization. However, cultural similarity and geographic proximity to the US enhance investors’ performance in US securities.
Keywords: international institutional investors, information advantage, under-diversification
JEL Classification: G11, G15
Suggested Citation: Suggested Citation