Industry Concentration and Foreign Investment
52 Pages Posted: 2 Nov 2013
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
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