Foreign Investment under the Spotlight of Home Media

Abstract

Foreign investors’ information disadvantage is often viewed as a key impediment to their investment. This study questions whether foreign investors’ home media mitigates this information barrier by investigating the relation between U.S. mutual fund ownership and U.S. media coverage of local stocks in their host countries. Using a large sample of 38 host countries, we document a positive association between U.S. mutual fund ownership in a local stock and the coverage of U.S. major news providers on that stock. We find that home media-covered stocks incur lower information acquisition costs and gain greater investor awareness from U.S. investors. The home media effect is most salient in host countries with low quality information environments, supporting a novel home media effect that foreign investors tend to rely on their home market media coverage as an information source. The home media effect helps explain the prominent international finance anomaly regarding the dependence of firm returns on home and foreign market factors.

Keywords: Foreign equity investment; Foreign mutual fund; Media coverage; Home media bias

JEL Classification: F21; F23; G23