Qinghai Wang, associate professor of finance
Published on: 01-19-2011
When investing in foreign stocks, investors show a strong
preference toward companies that have a physical presence in their home
country, according to a study by a Georgia Tech College of Management researcher.
The type of presence in question involves corporate operations or subsidiaries,
not just exporting products somewhere.
"The idea of international investment is to diversify
your portfolio globally," explains Qinghai Wang, associate professor of
finance at Georgia Tech. "But you might not be truly doing that if you
invest in companies strongly affected by your home economy – for example,
diversifying in Japanese stocks but choosing companies like Toyota
and Honda with a heavy U.S.
Wang conducted the study, "Home Bias in Foreign
Investment Decisions," with Dongmin Ke of Kean University and Lilian Ng of
the University of Wisconsin-Milwaukee.
Published in the Journal
of International Business Studies, the study shows that even mutual fund
managers – professionals who might be expected to have a broader worldview – are
prone to this "home bias." The researchers examined the U.S. equity
holdings of more than 3,000 non-U.S.-based mutual funds from 22 developed and
developing countries for the period 2001-2002. The study focused solely on the
fund managers' foreign investments in the U.S. equity market.
"Fund managers who have
different languages and cultural backgrounds and are located farther away from U.S. equity markets are more likely to invest in
firms with local presence," write the researchers. "Fund holdings of
such stocks, however, perform no better than a passive portfolio of all U.S.
stocks with local presence, suggesting that the local presence of foreign firms
does not provide significant information advantages to local fund managers."
In addition, the home bias shown
by the study was independent of the global visibility of a firm. For instance,
foreign investors still might be less likely to invest in a company as widely
known as Coca-Cola if it didn't have an operational presence in their home
"Our evidence implies that
firms could raise equity financing in the foreign markets by establishing a
foreign presence in those markets, and policymakers could attract foreign
investments in their domestic equity markets by encouraging domestic firms to
expand internationally," write the researchers.
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