Country portfolios with imperfect corporate governance

Arbeitspapier

Equity home bias is one of the most enduring puzzles in international finance. In this paper, I start out by documenting a novel stylized fact about home bias: countries with weaker domestic institutions hold fewer foreign assets. I then explore a macroeconomic mechanism by which the presence of agency problems in firms may explain this pattern. To do so, I develop a two-country dynamic stochastic general equilibrium model of international portfolio choice with corporate governance frictions and two distinct agents - outside investors (outsiders) and large controlling shareholders (insiders). Insiders can extract private benefits of control from a firm at a cost which is lower when institutions are weaker. I show that the interaction between the insider's private benefits and investment decisions leads asset and labor income for outsiders to be more negatively correlated in countries with weaker institutions. Thus, outsiders in these countries bias their portfolios more towards home assets to hedge their labor income risk. Calibrating the model to match existing estimates of private benefits of control, I am also able to replicate the cross-country dispersion in insider ownership and investment volatility seen in the data.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Graduate Institute of International and Development Studies Working Paper ; No. 08/2011

Classification and Topics

• Classification: Wirtschaft ; International Investment; Long-term Capital Movements ; Open Economy Macroeconomics ; International Financial Markets
• Subject: home bias ; institutional quality ; corporate governance ; Home Bias Puzzle ; Institutionelle Infrastruktur ; Corporate Governance ; Portfolio-Management ; Dynamisches Gleichgewicht ; Zwei-Länder-Modell ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mukherjeey, Rahul
• Event: Veröffentlichung
• (who): Graduate Institute of International and Development Studies
• (where): Geneva
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/77380
• Last update: 10.03.2025, 11:43 AM CET