Information Costs and Home Bias: An Analysis of U.S. Holdings of Foreign Equities

57 Pages Posted: 15 Feb 2001

See all articles by Alan G. Ahearne

Alan G. Ahearne

National University of Ireland, Galway (NUIG) - Department of Economics

William L. Griever

Government of the United States of America - International Financial Transactions Section

Francis E. Warnock

University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)

Date Written: May 2001

Abstract

Using a comprehensive new data set, we exploit the cross-sectional variation of U.S. holdings of equities in a wide range of countries to gain insight into the equity home bias phenomenon. We find that a direct barrier to international investment - restrictions on foreign ownership of equities - significantly affects the country distribution of U.S. equity holdings, but has only a small effect on the overall level of home bias. More important are information asymmetries due to the poor quality and low credibility of financial information in many countries. While no direct measure of information costs is available, some foreign firms have reduced these costs by publicly listing their securities in the United States, where investor protection regulations elicit standardized, credible financial information. We find that a proxy for the reduction in information asymmetries - the portion of a country's market that has a public U.S. listing - is a major determinant of a country's weight in U.S. investors' portfolios. Foreign countries whose firms do not alleviate information costs by opting into the U.S. regulatory environment are more severely underweighted in U.S. equity portfolios.

Keywords: Information asymmetries; Investor protection; Accounting standards; Portfolio choice

JEL Classification: G11, G15, M41, K22

Suggested Citation

Ahearne, Alan G. and Griever, William L. and Warnock, Francis E., Information Costs and Home Bias: An Analysis of U.S. Holdings of Foreign Equities (May 2001). FRB International Finance Discussion Paper No. 691. Available at SSRN: https://ssrn.com/abstract=260228 or http://dx.doi.org/10.2139/ssrn.260228

Alan G. Ahearne

National University of Ireland, Galway (NUIG) - Department of Economics ( email )

Newcastle Road
Galway
Ireland

William L. Griever

Government of the United States of America - International Financial Transactions Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2924 (Phone)
202-872-4926 (Fax)

Francis E. Warnock (Contact Author)

University of Virginia - Darden Business School ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-6076 (Phone)

HOME PAGE: http://faculty.darden.virginia.edu/warnockf/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138-5398

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