Do Foreigners Invest Less in Poorly Governed Firms?

Abstract

The statistical analysis of security-level data on U.S. investors' holdings reported in this study was conducted at the International Finance Division of the Board of Governors of the Federal Reserve System under arrangements that maintained legal confidentiality requirements. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.

The weight of bad governance in foreign mutual funds

“…This comparative statics analysis is supported by the empirical findings of Aggarwal et al (2005), Leuz et al (2009), andDas (2008).…”

“…This simple, partial equilibrium model finds that when the cost of actively managing badly governed stocks increases, their weight in the mutual fund manager's portfolio will decrease. This explains why there may be an apparent home bias on the part of mutual fund managers as found in the empirical work of Aggarwal et al (2005), Leuz et. al (2009), andDas (2008).…”

“…In addition, they find institutional investors avoid stocks that have less accounting transparency. Leuz et al (2009) finds that individual U.S. investors favor stock in foreign companies that are based in countries with strong investor protections, have lower levels of insider ownership, and exhibit low levels of accruals. Das (2008) finds that mutual funds based outside the United States tend to avoid stock in poorly governed firms from different countries than where their fund is based.…”

Large Foreign Ownership and Firm-Level Stock Return Volatility in Emerging Markets

“…To capture the practical barriers, the S&P Emerging Markets database defines small and illiquid stocks as noninvestible. 7 It then creates a variable called the "degree open factor" or "investible weight," which ranges from 6 Some other studies also show that governance environments and monitoring ability play an important role in determining cross-border acquisitions and fixed investments (Rossi and Volpin (2004), Kelley and Woidtke (2006)), as well as international investment allocation (Dahlquist, Pinkowitz, Stulz, and Williamson (2003), Chan, Covrig, and Ng (2005), and Leuz, Lins, and Warnock (2009)). 7 These criteria vary at the discretion of S&P's Index Committee.…”

Global versus Local Asset Pricing: A New Test of Market Integration

“…3 1 All shares held for control reasons, such as government stakes or family holdings, are also not part of the market benchmark definition. A further reduction of the "investable" part of the market might result from investor concerns about governance (Leuz, Lins, and Warnock 2009). models typically feature many free parameters, and the corresponding loss of statistical power may explain the weak empirical support for the world CAPM model. Dynamic models, which nest both polar cases of market integration and segmentation, may also depend on unobservable state variables.…”