Foreign Institutional Investment: Is Governance Quality at Home Important?

48 Pages Posted: 8 Mar 2011 Last revised: 24 Jan 2013

See all articles by Nida Abdioglu

Nida Abdioglu

Bandirma Onyedi Eylul University/ Faculty of Economics and Administrative Sciences

Arif Khurshed

University of Manchester - Manchester Business School, Division of Accounting Finance

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Date Written: February 2013

Abstract

This paper examines the investment preferences of foreign institutional investors investing in the U.S. market. We analyse both firm and country-level determinants that influence the foreign institutional investors’ allocation choices. At the country level, we find that the governance quality in a foreign institutional investor’s home country is a determinant of their decision to invest in the U.S. market. Our findings indicate that investors who come from countries with governance setups similar to that of the U.S. invest more in the United States. The investment levels though, are more pronounced for countries with governance setups just below that of the U.S. Our results are consistent with both the ‘flight to quality’ and ‘familiarity’ arguments, and help reconcile prior contradictory empirical evidence. At the firm level, we present unequivocal evidence in favour of the familiarity argument. Foreign institutional investors domiciled in countries with high governance quality prefer to invest in U.S. firms with high corporate governance quality. This effect is primarily driven by grey (non-monitoring) institutional investors.

Keywords: Foreign institutional investment, home country effect, flight to quality, familiarity argument

JEL Classification: G11, G20, G38

Suggested Citation

Abdioglu, Nida and Khurshed, Arif and Stathopoulos, Konstantinos, Foreign Institutional Investment: Is Governance Quality at Home Important? (February 2013). Journal of International Money and Finance, Vol. 32, 2013, Available at SSRN: https://ssrn.com/abstract=1780340 or http://dx.doi.org/10.2139/ssrn.1780340

Nida Abdioglu (Contact Author)

Bandirma Onyedi Eylul University/ Faculty of Economics and Administrative Sciences ( email )

Balikesir, 10200
Turkey

Arif Khurshed

University of Manchester - Manchester Business School, Division of Accounting Finance ( email )

Crawford House
Oxford Road
Manchester, M15 6PB
United Kingdom
+44 0 161 275 4475 (Phone)
+44 0 161 275 4023 (Fax)

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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