Foreign bias in institutional portfolio allocation: The role of social trust
69 Pages Posted: 12 Aug 2020 Last revised: 7 Jun 2021
Date Written: June 7, 2021
We study the eﬀects of social trust on international asset allocation. Using a comprehensive international sample of institutionally managed portfolios from 86 countries, we show that institutional investors from high-trust countries are less prone to foreign bias and exhibit superior cross-country diversiﬁcation. The results suggest that the informal institution of social trust and formal institutions are substitutes in international portfolio decisions. Using events of exogenous variation in information asymmetry, we ﬁnd support for an informationbased explanation. Our ﬁndings also have implications at the ﬁrm level, where we observe a lower cost of equity for ﬁrms with more trusting investors.
Keywords: Trust, foreign bias, institutional investors, culture, information asymmetries, portfolio diversiﬁcation, cost of equity
JEL Classification: G11, G14, G15, G23, Z1
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