Foreign bias in institutional portfolio allocation: The role of social trust

72 Pages Posted: 12 Aug 2020 Last revised: 30 May 2023

See all articles by Wolfgang Drobetz

Wolfgang Drobetz

University of Hamburg

Marwin Mönkemeyer

University of Hamburg - Hamburg Business School

Ignacio Requejo

University of Salamanca - Administration and Business Economics

Henning Schröder

Leuphana University Lüneburg; Hamburg Financial Research Center

Date Written: May 27, 2023

Abstract

We study the role of social trust in the equity allocation decisions of global investors using a large sample of institutionally managed portfolios of 8,088 investors from 33 countries over the 2000–2017 period. The negative relation between social trust and foreign bias suggests that institutional investors from high-social trust countries are less prone to underinvesting in foreign equity. Our results provide credence to an information-based explanation, indicating that social trust reduces foreign bias by compensating the lack of information about foreign stock markets. Moreover, the effect of social trust on foreign bias is stronger if host-country institutions are weaker, while it vanishes when the host country has a strong institutional framework. The informal institution of social trust can compensate for the lack of formal country-level institutions in international portfolio decisions. Finally, social trust is different from mere “blind” trust because it helps investors to accomplish higher cross-country portfolio diversification and an improved risk-return trade-off.

Keywords: Trust, foreign bias, portfolio diversification, information asymmetry, institutional investors, culture

JEL Classification: G11, G14, G15, G23, Z1

Suggested Citation

Drobetz, Wolfgang and Mönkemeyer, Marwin and Requejo, Ignacio and Schröder, Henning, Foreign bias in institutional portfolio allocation: The role of social trust (May 27, 2023). Available at SSRN: https://ssrn.com/abstract=3651533 or http://dx.doi.org/10.2139/ssrn.3651533

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Marwin Mönkemeyer

University of Hamburg - Hamburg Business School ( email )

Moorweidenstr. 18
Hamburg, 20148
Germany

Ignacio Requejo

University of Salamanca - Administration and Business Economics

Campus Miguel de Unamuno
Salamanca, ES-37007
Spain

Henning Schröder (Contact Author)

Leuphana University Lüneburg ( email )

Lueneburg
Germany

Hamburg Financial Research Center

Hamburg
Germany

HOME PAGE: http://www.hfrc.org

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
206
Abstract Views
739
Rank
263,053
PlumX Metrics