Why is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan

43 Pages Posted: 10 Jun 2000 Last revised: 31 Aug 2010

See all articles by Jun-Koo Kang

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1995

Abstract

This paper uses data on foreign stock ownership in Japan from 1975 to 1991 to examine the determinants of the home bias in portfolio holdings. Existing models of international portfolio choice predicting that foreign investors hold national market portfolios or portfolios tilted towards high expected return stocks are inconsistent with the evidence provided in this paper. We document that foreign investors overweight shares of firms in manufacturing industries, large firms, firms with good accounting performance, firms with low unsystematic risk, and firms with low leverage. Controlling for size, there is evidence that small firms that export more have greater foreign ownership. Foreign investors do not perform significantly worse than if they held the Japanese market portfolio, however. After controlling for firm size, there is no evidence that foreign ownership is related to expected returns of shares. We show that a model with size-based informational asymmetries and deadweight costs can yield asset allocations consistent with our evidence.

Suggested Citation

Kang, Jun-Koo and Stulz, Rene M., Why is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan (July 1995). NBER Working Paper No. w5166. Available at SSRN: https://ssrn.com/abstract=225229

Jun-Koo Kang (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

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Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

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Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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Belgium

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