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53
Information Immobility and the Home Bias Puzzle
- Journal of Finance
, 2009
"... Many papers have argued that home bias arises because home investors can predict payoffs of their home assets more accurately than foreigners can. But why does this information advantage exist in a world where investors can learn foreign information? We model investors who are endowed with a small h ..."
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Cited by 60 (3 self)
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Many papers have argued that home bias arises because home investors can predict payoffs of their home assets more accurately than foreigners can. But why does this information advantage exist in a world where investors can learn foreign information? We model investors who are endowed with a small home information advantage. They can choose what information to learn before they invest in many risky assets. Surprisingly, even when home investors can learn what foreigners know, they choose not to. The reason is that investors profit more from knowing information that others do not know. Allowing investors to learn amplifies their initial information asymmetry. The model explains local and industry bias as well as observed patterns of foreign investments, portfolio out-performance and asset prices. Finally, we outline new avenues for empirical research.
HOME BIAS IN GLOBAL BOND AND EQUITY MARKETS -- THE ROLE OF REAL EXCHANGE RATE VOLATILITY
, 2006
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The geography of hedge funds
- Review of Financial Studies
, 2009
"... Forthcoming in the Review of Financial Studies This paper analyzes the relationship between the risk-adjusted performance of hedge funds and their proximity to investments using data on Asian-focused hedge funds. We find, relative to an augmented Fung and Hsieh (2004) factor model, that hedge funds ..."
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Cited by 24 (2 self)
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Forthcoming in the Review of Financial Studies This paper analyzes the relationship between the risk-adjusted performance of hedge funds and their proximity to investments using data on Asian-focused hedge funds. We find, relative to an augmented Fung and Hsieh (2004) factor model, that hedge funds with a physical presence (head or research office) in their investment region outperform other hedge funds by 3.72 percent per year. The local information advantage is pervasive across all major geographical regions, but is strongest for Emerging Market funds and funds holding illiquid securities. These results are robust to adjustments for fund fees, serial correlation, backfill bias, and incubation bias. We show also that distant funds, especially those based in the U.S. and the U.K., are able to raise more capital, charge higher fees, and set longer redemption periods, despite their underperformance relative to nearby funds. It appears that distant funds trade investment performance for better access to capital. (JEL G11, G12, G23)
Forecasting ECB Monetary Policy: Accuracy Is (Still) a
- Matter of Geography,” IMF Working Paper 06/41 (Washington: International Monetary Fund
, 2006
"... This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to eli ..."
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Cited by 23 (1 self)
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This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Monetary policy in the euro area is conducted within a multicountry, multicultural, and multilingual context involving multiple central banking traditions. How does this heterogeneity affect the ability of economic agents to understand and to anticipate monetary policy by the European Central Bank (ECB)? Using a database of surveys of professional ECB policy forecasters in 24 countries, we find remarkable differences in forecast accuracy, and show that they are partly related to geography and clustering around informational hubs, as well as to country-specific economic conditions and traditions of independent central banking in the past. In large part, this heterogeneity can be traced to differences in forecasting models. While some systematic differences between analysts have been transitional and are indicative of learning, others are more persistent.
The investment behavior of state pension plans. Working Paper
, 2011
"... Abstract: This paper provides evidence on the investment behavior of 20 state pension plans that actively manage their own equity portfolios. We find that while these states tend to hold a diversified portfolio that approximates the overall market, they nonetheless substantially overweight the holdi ..."
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Cited by 7 (0 self)
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Abstract: This paper provides evidence on the investment behavior of 20 state pension plans that actively manage their own equity portfolios. We find that while these states tend to hold a diversified portfolio that approximates the overall market, they nonetheless substantially overweight the holdings of stocks of companies that are headquartered in-state. The extent of this over-weighting of within-state stocks by state pension plans is three times larger than that of other institutional investors. We explore three possible reasons for this in-state bias, including familiarity bias, information-based investing, and non-financial/political considerations. State boundaries are important for predicting state pension plan holdings – while there is a significant preference for instate stocks, there is no similar tilt toward holding stocks from neighboring stocks. We find evidence that states are able to generate excess returns through their in-state investment activities, particularly among smaller stocks in the primary industry in the state. However, we also find evidence that is at least suggestive of political influence playing a role in the stock selection process, as state pension plans of corrupt states are more likely to hold withinstate stocks. The difference in performance between within-state and out-of-state stock investments is strongest for the state pension plans located in more corrupt states.
The impact of firm location on equity issuance
- Financial Management
, 2008
"... In this paper, I use location as a proxy for the ability of a firm to issue equity. Numerous studies indicate that investors are better able to obtain information on nearby companies. I posit that costs in generating information will be higher for rural firms with few investors in their proximity, t ..."
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Cited by 7 (0 self)
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In this paper, I use location as a proxy for the ability of a firm to issue equity. Numerous studies indicate that investors are better able to obtain information on nearby companies. I posit that costs in generating information will be higher for rural firms with few investors in their proximity, than for urban firms with many nearby investors. As predicted, I find that rural firms are less likely to conduct seasoned equity offerings than firms located in urban areas. Furthermore, I find that when a rural firm issues equity, it uses a lower-quality underwriter than otherwise similar urban firms. Why and when firms issue equity is a central corporate finance question that is not well understood. Myers and Majluf (1984) observe that information asymmetries between managers and outside investors can make it expensive to raise funds through equity offerings and may lead some financially constrained firms to forgo valuable projects rather than sell stock. Myers (1984) takes this observation further and develops a pecking order theory of capital structure. In this theory, firms issue equity only as a last resort, and capital structure is determined in large part by the firms ’ ability to finance internally. While pecking order theory as a main theory of security issuance is appealing, many stylized
Geographic Proximity and Price Discovery: Evidence from Nasdaq *
, 2008
"... paper combines two other papers that were circulated under the titles “Geography and Equity Market Making ” and “Geographic Proximity and Price Discovery: Evidence from Nasdaq. ” Geographic Proximity and Price Discovery: Evidence from Nasdaq We use the Nasdaq market making context to study the role ..."
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Cited by 4 (0 self)
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paper combines two other papers that were circulated under the titles “Geography and Equity Market Making ” and “Geographic Proximity and Price Discovery: Evidence from Nasdaq. ” Geographic Proximity and Price Discovery: Evidence from Nasdaq We use the Nasdaq market making context to study the role of geographic proximity in the price discovery of a firm’s stock. We show that market makers closer to the firm's headquarters spend more time at the inside bid and ask quotes, initiate larger changes in the quotes, and account for greater information share when compared to non-local market makers. Examining a sample of relocating firms, we also find that market makers moving farther away from the firm after relocation experience a reduction in their contributions to price discovery. We provide evidence that the stronger imprint of
On the structure of analyst research portfolios and forecast accuracy
- Journal of Accounting Research
, 2009
"... Credit Suisse First Boston) have given us valuable insights from a practitioner’s perspective. We thank IBES for providing us permission to use their database and Ajay Negi of IBES for patiently answering all our questions regarding IBES International. We acknowledge valuable ..."
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Cited by 3 (1 self)
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Credit Suisse First Boston) have given us valuable insights from a practitioner’s perspective. We thank IBES for providing us permission to use their database and Ajay Negi of IBES for patiently answering all our questions regarding IBES International. We acknowledge valuable
(Interstate) Banking and (Interstate) Trade: Does Real Integration Follow Financial Integration? *
, 2011
"... We conjecture that banks present in two regions charge the appropriate risk premiums for trade-related projects between these markets, whereas higher rates are charged for projects involving shipments to markets where they are absent. These differences affect regional trade flows. US interstate bank ..."
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Cited by 2 (0 self)
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We conjecture that banks present in two regions charge the appropriate risk premiums for trade-related projects between these markets, whereas higher rates are charged for projects involving shipments to markets where they are absent. These differences affect regional trade flows. US interstate banking deregulation serves as a natural experiment to test our model’s implication with the Commodity Flow Survey data. Difference-in-differences estimates suggest that the trade share of state-pairs that allowed pairwise interstate entry increased by 14 % over ten years relative to non-integrated state-pairs. Instrumental variables estimates suggest that an actual increase in bank integration from zero to 2.28% (the mean) increases trade 17 % to 25%.
Local director talent and board governance, Unpublished Working Paper
, 2008
"... This paper examines the effects of director labor markets at firm headquarter locations on board governance. We argue that firms can implement better board governance by drawing on local director talent when a larger pool of prospective directors (officers and directors of same-industry firms, finan ..."
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Cited by 2 (0 self)
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This paper examines the effects of director labor markets at firm headquarter locations on board governance. We argue that firms can implement better board governance by drawing on local director talent when a larger pool of prospective directors (officers and directors of same-industry firms, financial institutions, and universities) is located near the firm. We find that firms located near large pools of prospective directors have a higher percentage of outside directors and directors with executive expertise on the board. Firms located closer to financial institutions and universities attract a higher percentage of directors with financial and academic expertise, respectively. The dependence of board governance on local director labor markets is greatest for less established firms (small size, short history, low product market share, no institutional blockholder). With the adoption of Sarbanes Oxley and exchange governance requirements, firms appear to have expanded the search for outside directors beyond local director labor markets. Based on our empirical evidence, we formulate an instrument for board composition and use it in a two-stage setting to reexamine the relation between governance and firm value with correction for endogeneity.
