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

69 Pages Posted: 12 Aug 2020 Last revised: 7 Jun 2021

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

University of Hamburg - Hamburg Business School; Hamburg Financial Research Center

Date Written: June 7, 2021

Abstract

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

Suggested Citation

Drobetz, Wolfgang and Mönkemeyer, Marwin and Requejo, Ignacio and Schröder, Henning, Foreign bias in institutional portfolio allocation: The role of social trust (June 7, 2021). 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)

University of Hamburg - Hamburg Business School ( email )

Moorweidenstr. 18
Hamburg, 20148
Germany

Hamburg Financial Research Center ( email )

c/o University of Hamburg
Moorweidenstr. 18
Hamburg, 20148
Germany

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