Do domestic and foreign fund managers have similar preferences for stock characteristics? A cross-country analysis

Abstract

Using a new unique data set on mutual fund stockholdings, we identify several interesting similarities and differences in the stock preferences of domestic and foreign fund managers from 11 developed countries. Results show that both groups of managers prefer stocks with high return on equity, large turnover, and low return variability, and that they also exhibit differential investment behavior. Domestic managers also favor firms that pay large dividends, have low financial distress and high growth potential, whereas foreign managers prefer to invest in corporations that are globally well known. The demand for globally visible stocks by foreign managers is especially strong when their fund mandate is to diversify globally or across regions, and is weakened when their stock holdings are concentrated mainly in a specific local market. The results also show no difference in the stock preferences of American-, European- and Asian-based funds. In general, our overall evidence suggests that the differential mandates of fund managers and hence the geographic allocations of their fund investments influence their stock preferences, but not the geographic location of the managers. Journal of International Business Studies (2006) 37, 407–429. doi:10.1057/palgrave.jibs.8400195

The Influence of Economic Factors on the Value Relevance of Accounting Information in Jordan

“…Since larger companies are more exposed to the public eye, take less time to report (Dyer & McHugh, 1975) and more information is available about them, foreign investors tend to have more knowledge about large companies than about small ones (Kang & Stulz, 1997). This leads to the expectation that less information asymmetry or lower cost of information acquisition will be found between domestic and foreign investors in large size companies (Covrig, Lau, & Ng, 2006). The larger the company size, the lower the information asymmetry degree (Kim & Yoo, 2009).…”

Mutual fund managers stock preferences in Latin America

“…North-American investors also prefer companies with ADR and good corporate governance. Covrig et al (2006) have found results for preferences of mutual fund managers (foreign and domestic) from 11 developed countries. For both classes, liquidity and return on equity were significant.…”

“…By selecting developed countries for the sample, Covrig et al (2006) tried to limit the surging of explicit barriers (the countries selected in their sample do not possess control capital politics) and limited it to those with more liquidity. Their results, however, were not different from the first ones, suggesting that the second class of implicit barriers (information asymmetry) has a bigger relevance.…”

“…Previous studies (Covrig, Lau, & Ng, 2006;Ferreira & Matos, 2008) focused on industry located at developed countries, and found that mutual fund managers have preferences for larger stocks (higher market value), with bigger liquidity and with some aspects related to visibility, like ADR listing and analyst coverage. This paper embodies this issue for Latin America.…”

Exchange risk premia and firm characteristics

“…This is because illiquidity will substantially reduce the potential earnings in emerging markets. For this reason, foreign portfolio investors are more likely to prefer companies with higher liquidity (see Aggarwal et al, 2005;Chan et al, 2005;Covrig et al, 2006;Ferreira and Matos, 2008;and Rhee and Wang, 2009; among others). However, foreign investors, even if internationally well diversified, could still face foreign exchange risk exposure as their cross-currency exposures are not perfectly matched and canceled out.…”