Does Home Bias Affect Firm Value? Evidence from Holdings of Mutual Funds Worldwide
37 Pages Posted: 31 Mar 2007
Date Written: March 2007
This study finds strong evidence that home bias affects firm valuation at both country and firm levels. Results show that, at the country level, domestic investors increasing weights in countries that they have over-weighted produces a negative impact on market valuation, while foreign investors increasing weights in countries that they have underweighted leads to enhanced market valuation. At the firm level, firm value increases as domestic and foreign investors weight local firms toward the firms' global market capitalization weights, but decreases as their weights deviate from global weights. Overall, the evidence is consistent with the optimal global risk-sharing hypothesis that the greater risk sharing between domestic and foreign investors in international capital markets reduces the cost of capital and hence enhances market valuation.
Keywords: Home Bias, Mutual Funds, Cost of Capital, Firm Value, Risk Sharing
JEL Classification: G11, G23
Suggested Citation: Suggested Citation