Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan

Stulz, René M.; Kang, Jun-Koo

This paper uses data on foreign stock ownership in Japan from 1975 to 1991 to examine the determinants of the home bias in portfolio holdings. Existing models of international portfolio choice predicting that foreign investors hold national market portfolios or portfolios tilted towards nigh expected return stocks are inconsistent with the evidence provided in this paper. We document that foreign investors overweight shares of firms in manufacturing industries, large firms, firms with good accounting performance, firms with low unsystematic risk, and firms with low leverage. Controlling for size, there is evidence that small firms that export more have greater foreign owner-snip. Foreign investors do not perform significantly worse than if they held the Japanese market portfolio, however. After controlling for firm size, there is no evidence that foreign ownership is related to expected returns of shares. We show that a model with size-based informational asymmetries and deadweight costs can yield asset allocations consistent with our evidence.

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Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Center on Japanese Economy and Business Working Papers, 111
Published Here
February 8, 2011