Home Bias in Foreign Investment Decisions

ABSTRACT This paper investigates the association between the adoption of international accounting standards and foreign investment decisions. Prior research suggests that information asymmetries between local and foreign investors and behavioral biases caused by unfamiliarity of the foreign markets contribute to investors preferring to invest in their home markets. Because one of the goals of the adoption of international accounting standards is to establish a high-quality, internationally familiar set of accounting standards, I predict that foreign investments will increase in countries that adopted International Financial Reporting Standards (IFRS) after the adoption and that this increase is driven by the familiarity of IFRS. I find that foreign equity portfolio investments (FPI) increase in countries that adopt IFRS. More importantly, I find that this relation is driven by foreign investors from countries that also use IFRS. Moreover, the effect of accounting familiarity is more pronounced when investor and investee countries share language, legal origin, culture, and region. I also find that countries with lower corruption and better investor protection experience larger increases in FPI after they adopt IFRS relative to other IFRS users. These findings are consistent with the hypothesis that familiar accounting information drives foreign investment decisions.

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The financial analysis of foreign investment decisions by large UK-based companies

European Journal of Finance ◽

10.1080/13518479600000004 ◽

1996 ◽

Vol 2 (2) ◽

pp. 181-206 ◽

Cited By ~ 2

Author(s):

Adrian Buckley ◽

Peter J.S. Buckley ◽

Pascal Langevin ◽

Ka Lun Tse

Keyword(s):

Foreign Investment ◽

Financial Analysis ◽

Investment Decisions

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German Corporate Convergence to a Market Based System

International Community Law Review ◽

10.1163/187197407x210283 ◽

2007 ◽

Vol 9 (2) ◽

pp. 209-232 ◽

Cited By ~ 2

Author(s):

Matthew Berger

Keyword(s):

Corporate Governance ◽

Financial Markets ◽

Foreign Investment ◽

Direct Investment ◽

Investment Decisions ◽

International Investment ◽

Governance System ◽

Legal Reforms ◽

Corporate Governance System ◽

International Investors

AbstractGermany has implemented several legal reforms in an attempt to attract international investment. Commentators proclaimed that a transition from a bank-based system of corporate governance to a market-based system was required in order for Germany to attract international investors. Debates still transpire regarding the success of the legal reforms implemented in an effort to make this change. This analysis explains Germany's previous corporate governance system and the new laws implemented to transform it to a market-based system. Empirical data is recited concerning the changes in foreign direct investment, German household investment decisions, and the German financial markets. The paper concludes that an analysis of this data reveals an increase of foreign investment in Germany and a substantial movement towards a market-based system throughout the duration of the legal reform.

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EU scrutiny of Chinese investment will increase

Emerald Expert Briefings ◽

10.1108/oxan-db234190 ◽

2018 ◽

Keyword(s):

Foreign Direct Investment ◽

Foreign Investment ◽

Direct Investment ◽

Investment Decisions ◽

European Council ◽

Content Type ◽

Chinese Investment ◽

Exchange Of Information ◽

European Parliament Elections ◽

The Eu

Subject Investment screening in the EU. Significance The European Council is likely to vote in the autumn on a Commission proposal to introduce a foreign direct investment (FDI) screening mechanism in the EU. Although member states are divided on this issue, legislation is expected to be adopted by the end of the year. Impacts The proposed mechanism could complicate EU-China relations. It would enable more coordination and exchange of information on national foreign investment decisions. If the mechanism is not adopted by the end of the year, it could be significantly delayed due to the May 2019 European Parliament elections.

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Private and Public Information for Foreign Investment Decisions

SSRN Electronic Journal ◽

10.2139/ssrn.1535901 ◽

1999 ◽

Cited By ~ 3

Author(s):

Yuko Kinoshita ◽

Ashoka Mody

Keyword(s):

Foreign Investment ◽

Public Information ◽

Investment Decisions ◽

Private And Public

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Confidence in the Familiar: An International Perspective

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109000003884 ◽

2004 ◽

Vol 39 (1) ◽

pp. 47-68 ◽

Cited By ~ 40

Author(s):

Kai Li

Keyword(s):

Foreign Investment ◽

Asset Allocation ◽

Home Bias ◽

International Perspective ◽

Expected Returns ◽

Investment Risk ◽

Prior Beliefs ◽

International Portfolio ◽

Home Bias Puzzle

AbstractOne striking feature of international portfolio investment is the extent to which equity portfolios are concentrated in the domestic equity market of the investor—the home bias puzzle. I examine the role of investors' perception of foreign investment risk on their portfolio choices. The expected returns and risk of foreign investment are specified through an asset pricing model with the home portfolio being the benchmark asset—Pastor's (2000) domestic CAPM. The model serves as a reference point around which investors can center their prior beliefs. I focus on investors' prior beliefs that are consistent with the literature on confidence in the familiar—foreign equities, in terms of both expected returns and risk, being viewed less favorably than domestic equities. These prior beliefs are then combined with the data on G7 equities, and the revised beliefs are used to obtain the global optimal asset allocation. To hold predominantly domestic equities, each G7 investor has to believe that the risk of foreign investment is several times higher than the actual risk. The home bias is more of a puzzle for a U.S. investor during the 1970s. Specifying investors' prior beliefs around the world CAPM does not help resolve the puzzle.

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