Foreign Investors' Reaction to Reduced Profitability - Does Governance Matter?

40 Pages Posted: 29 May 2007

See all articles by Tom Berglund

Tom Berglund

Hanken School of Economics - Department of Economics

P. Joakim Westerholm

University of Sydney Business School

Date Written: May 26, 2007

Abstract

The home bias in international portfolios has been explained by foreign investors' exposure to more severe moral hazard problems than domestic investors. A drop in expected returns will increase the likelihood of these hazards, causing foreign investors to react more strongly to profit warnings than domestic investors. In data on profit warnings, intraday trades, and shareholder deposits from the Helsinki Stock Exchange foreign investors are more likely to sell and domestic investors more likely to buy following profit warnings. The extent of foreign investor reaction depends on the level of surprise at the profit warning, perceived information asymmetry, and corporate governance-related indicators. We also consider alternative explanations, foreign investors' sophistication, familiarity of company, information uncertainty and the treatment of the foreign investments as small growth companies.

Keywords: profit warnings, home bias, moral hazard

JEL Classification: G14, G30

Suggested Citation

Berglund, Tom Patrik and Westerholm, P. Joakim, Foreign Investors' Reaction to Reduced Profitability - Does Governance Matter? (May 26, 2007). Available at SSRN: https://ssrn.com/abstract=989128 or http://dx.doi.org/10.2139/ssrn.989128

Tom Patrik Berglund

Hanken School of Economics - Department of Economics ( email )

PO Box 479
FI-00101 Helsinki
Finland
+358-9-43133 345 (Phone)
+358-9-43133 382 (Fax)

P. Joakim Westerholm (Contact Author)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

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