Industry Concentration and Foreign Investment

52 Pages Posted: 2 Nov 2013

See all articles by Andriy Bodnaruk

Andriy Bodnaruk

University of Illinois at Chicago

Massimo Massa

INSEAD - Finance

Date Written: October 31, 2013


We study how product market competition affects the firm’s ownership by international and domestic investors and its stock performance. We argue that in the presence of local bias domestic investors tilt their portfolios towards domestic stocks that offer lower exposure to country-specific risks. Industry concentration mitigates local risks and increases reservation value of firms operating in concentrated industries for domestic investors. This makes domestic (foreign) investors more likely to invest in stocks of concentrated (competitive) industries. Building on the stylized fact that foreign investors exhibit stronger reaction to news events, we demonstrate that increase in industry sentiment leads to higher stock performance for firms in concentrated industries, particularly when their foreign ownership is large. Stock prices of firms in competitive industries also faster incorporate new information.

Keywords: home bias, industry concentration, foreign portfolio investment

JEL Classification: F30, F36, G12, G15

Suggested Citation

Bodnaruk, Andriy and Massa, Massimo, Industry Concentration and Foreign Investment (October 31, 2013). Available at SSRN: or

Andriy Bodnaruk (Contact Author)

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Massimo Massa

INSEAD - Finance ( email )

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+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

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