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Investor Familiarity and Home Bias: Japanese Evidence

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  • Takato Hiraki
  • Akitoshi Ito
  • Fumiaki Kuroki

Abstract

We examine how foreign and domestic portfolio investors, both classified into money managers, invest in Japanese firms over the sample period of 1985–1998. We propose the agency-familiarity hypothesis to explain investment behavior of these institutional investors focusing on the two firm-level variables: market capitalization and export ratios. Both types of institutional investors over-invest in familiar firms measured in firm size while each shows opposite preference patterns with respect to the export ratios. The foreign investors become more export-firm oriented in the second-half sample and the domestic orientation of the domestic institutional investors becomes statistically significant during the same second-half. Because of the location difference of their client investors, the compositions of familiar firms are different between these two types with respect to the firm’s export activities. Home bias at the firm level in terms of the sensitivity to the export ratio is evident for both types of investors, especially, in more recent years, although equity home bias at the country level has been gradually mitigated. Based on these macro- and micro-level results, we conclude that the investment behavior of money managers is more consistent with the agency-familiarity explanation than the information-based explanation regardless of their nationalities. Copyright Springer Science + Business Media, Inc. 2003

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  • Takato Hiraki & Akitoshi Ito & Fumiaki Kuroki, 2003. "Investor Familiarity and Home Bias: Japanese Evidence," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 10(4), pages 281-300, December.
    • Handle: RePEc:kap:apfinm:v:10:y:2003:i:4:p:281-300
    DOI: 10.1007/s10690-005-4227-x
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    3. MIYAJIMA Hideaki & HODA Takaaki & OGAWA Ryo, 2015. "Does Ownership Really Matter? The role of foreign investors in corporate governance in Japan," Discussion papers 15078, Research Institute of Economy, Trade and Industry (RIETI).
    4. MIYAJIMA Hideaki & OGAWA Ryo, 2016. "Convergence or Emerging Diversity? Understanding the impact of foreign investors on corporate governance in Japan," Discussion papers 16053, Research Institute of Economy, Trade and Industry (RIETI).
    5. Mishra, Anil V., 2013. "Foreign ownership in Australian firms," Research in International Business and Finance, Elsevier, vol. 28(C), pages 1-18.
    6. Mishra, Anil V. & Ratti, Ronald A., 2011. "Governance, monitoring and foreign investment in Chinese companies," Emerging Markets Review, Elsevier, vol. 12(2), pages 171-188, June.
    7. Hideaki Miyajima & Takaaki Hoda, 2015. "Ownership Structure and Corporate Governance: Has an Increase in Institutional Investors f Ownership Improved Business Performance?," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 11(3), pages 361-394, July.

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