Foreign Investments of U'S' Individual Investors: Causes and Consequences

33 Pages Posted: 3 Jan 2005

See all articles by Warren Bailey

Warren Bailey

Cornell University; Fudan University - Fanhai International School of Finance and China Institute of Economics and Finance

Alok Kumar

University of Miami - Miami Herbert Business School

David T. Ng

Johnson College of Business

Date Written: April 2007

Abstract

Using thousands of brokerage accounts of U.S. individual investors, we analyze the motivations and consequences of foreign equity investment. We find that diversification is not the only reason that investors trade foreign securities. While wealthier, more experienced investors enjoy an informational advantage and, thus, are more likely to invest overseas and experience good portfolio performance, other investors appear to venture abroad for the wrong reasons. In particular, behaviorally-biased investors often under-use or misuse foreign equity securities and experience poor portfolio performance. Some investors appear to use foreign securities for speculation or to improve upon poor domestic portfolio performance.

Keywords: Individual investors, diversification, home bias, local bias, over-confidence

JEL Classification: G11, G14, G15

Suggested Citation

Bailey, Warren B. and Kumar, Alok and Ng, David T., Foreign Investments of U'S' Individual Investors: Causes and Consequences (April 2007). AFA 2007 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=633902 or http://dx.doi.org/10.2139/ssrn.633902

Warren B. Bailey

Cornell University ( email )

S. C. Johnson Graduate School of Management
387 Sage Hall
Ithaca, NY 14853-6201
United States
607-255-4627 (Phone)
607-254-4590 (Fax)

HOME PAGE: http://courses.cit.cornell.edu/wbb1/

Fudan University - Fanhai International School of Finance and China Institute of Economics and Finance ( email )

China

Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

David T. Ng

Johnson College of Business ( email )

301G Warren Hall, Cornell University
Ithaca, NY 14850-1967
United States
6072550145 (Phone)

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