| Abstract: |
This paper investigates the underlying determinants of home bias using a
comprehensive data set on U.S. investors’ aggregate holdings of every
foreign stock. Among those foreign stocks that are not listed on U.S.
exchanges, which account for more than 96 percent of our usable data sample,
we find that U.S. investors prefer firms with characteristics associated with
greater information transparency, such as stronger home-country accounting
standards. We document that a U.S. cross-listing is economically important, as
U.S. ownership of a foreign firm roughly doubles upon cross-listing in the
United States. We explore the cross-sectional variation in this
“cross-listing effect†and find that the increase in U.S. investment is
greatest for firms that are from weak accounting backgrounds and are otherwise
informationally opaque, suggesting that the key effect of cross-listing is
improvements in disclosure that are valued by U.S. investors. By contrast,
cross-listing does not increase the appeal of stocks from countries with weak
shareholder rights, suggesting that U.S. cross-listing cannot substitute for
legal protections in the home country. Nor does the cross-listing effect
appear to be driven simply by increased “familiarity†with the stock or
lowered cross-border transactions costs. |