Does Home Bias Affect Firm Value? Evidence from Holdings of Mutual Funds Worldwide

37 Pages Posted: 31 Mar 2007

See all articles by Lilian Ng

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Kalok Chan

CUHK Business School

Vicentiu Covrig

California State University, Northridge - Department of Finance, Financial Planning and Insurance

Date Written: March 2007

Abstract

This study finds strong evidence that home bias affects firm valuation at both country and firm levels. Results show that, at the country level, domestic investors increasing weights in countries that they have over-weighted produces a negative impact on market valuation, while foreign investors increasing weights in countries that they have underweighted leads to enhanced market valuation. At the firm level, firm value increases as domestic and foreign investors weight local firms toward the firms' global market capitalization weights, but decreases as their weights deviate from global weights. Overall, the evidence is consistent with the optimal global risk-sharing hypothesis that the greater risk sharing between domestic and foreign investors in international capital markets reduces the cost of capital and hence enhances market valuation.

Keywords: Home Bias, Mutual Funds, Cost of Capital, Firm Value, Risk Sharing

JEL Classification: G11, G23

Suggested Citation

Ng, Lilian and Chan, Kalok and Covrig, Vicentiu, Does Home Bias Affect Firm Value? Evidence from Holdings of Mutual Funds Worldwide (March 2007). Available at SSRN: https://ssrn.com/abstract=970396 or http://dx.doi.org/10.2139/ssrn.970396

Lilian Ng

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Vicentiu Covrig (Contact Author)

California State University, Northridge - Department of Finance, Financial Planning and Insurance ( email )

Northridge, CA 91330-8379
United States

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