Foreign versus local investors: Who knows more? Who makes more?

A cultural explanation of the foreign bias in international asset allocation

“…In addition, the home bias is often attributed to information (cost) arguments, familiarity arguments or a combination of the two (e.g. Kalev et al, 2008). However, more recent research proposes several arguments based on behavioral finance theory.…”

International diversification strategies: Revisited from the risk perspective

“…Lack of integration implies that country and individual risks will be important factors in determining stock returns, and therefore investor behaviour (Chandar et al, 2009;Chung et al, 2009). Second, many groups of investors are constrained in their portfolio selection by asymmetric information, domestic regulations and corporate policies (Kalev et al, 2008;Silva and Chavez, 2008). Pension funds and others have fiduciary obligations which often limit the currencies and firms in which they can invest.…”

Does the difference in valuation between domestic and foreign investors help explain their distinct holdings of domestic stocks?

“…However, even after the massive financial integration that occurred in the 1980s and 1990s and the resultant reduction in barriers to information acquisition across countries, the difference in stock holdings between locals and foreigners persists (e.g., Karolyi and Stulz, 2003). What's worse, empirical evidence regarding the information asymmetry between domestic and foreign investors is quite mixed (Grinblatt and Keloharju, 2000;Seasholes, 2000;Froot et al, 2001;Choe et al, 2005;Froot and Ramadorai, 2008;Kalev et al, 2008;Chang et al, 2009;Chen et al, 2009). Hence, an alternative approach is definitely warranted.…”