TY - JOUR

T1 - Foreign bias in institutional portfolio allocation

T2 - The role of social trust

AU - Drobetz, Wolfgang

AU - Mönkemeyer, Marwin

AU - Requejo, Ignacio

AU - Schröder, Henning

N1 - Mönkemeyer acknowledges financial support from the State of Hamburg Graduate Funding Program . Requejo acknowledges financial support from the Spanish Ministry of Science and Innovation and AEI ( PMCIN/AEI/10.13039/501100011033 , Grant PID2019-107546GA-I00 ), and he is grateful to the Junta de Castilla y León and the European Regional Development Fund (Grant CLU-2019-03 ) for the financial support to the Research Unit of Excellence “Economic Management for Sustainability” (GECOS). Part of this research was completed while Requejo was a DAAD (German Academic Exchange Service) Visiting Professor at the University of Hamburg. We thank two referees, Nihat Aktas, Wolfgang Bessler, Sadok El Ghoul, Omrane Guedhami, Raghavendra Rau, Nic Schaub, Simon Straumann, Joachim Winter (editor), participants at the 2021 AFFI Conference (Nantes), the 2021 EFMA Annual Conference (Leeds), the 2021 DGF Annual Meeting (Innsbruck), the 2022 FMA European Conference (Lyon), and the WHU Finance Research Seminar for helpful comments. All remaining errors are our own. Publisher Copyright: © 2023 Elsevier B.V.

PY - 2023/10/1

Y1 - 2023/10/1

N2 - We study the role of social trust in the equity allocation decisions of global investors using a large sample of institutionally managed portfolios of 8,088 investors from 33 countries over the 2000 through 2017 period. The negative relationship between social trust and foreign bias suggests that institutional investors from high-social trust countries are less prone to underinvesting in foreign equity. Our results provide credence to an information-based explanation, indicating that social trust reduces foreign bias by compensating for the lack of information about foreign stock markets. Moreover, the effect of social trust on foreign bias is stronger if host-country institutions are weak, while it vanishes when the host country is characterized by strong institutions. The informal institution of social trust compensates for the lack of well-functioning formal country-level institutions in international portfolio decisions. Finally, the allocation effect resulting from social trust is different from “blind” trust. The portfolios of high-trust investors exhibit higher cross-country diversification and an enhanced portfolio risk-return trade-off.

AB - We study the role of social trust in the equity allocation decisions of global investors using a large sample of institutionally managed portfolios of 8,088 investors from 33 countries over the 2000 through 2017 period. The negative relationship between social trust and foreign bias suggests that institutional investors from high-social trust countries are less prone to underinvesting in foreign equity. Our results provide credence to an information-based explanation, indicating that social trust reduces foreign bias by compensating for the lack of information about foreign stock markets. Moreover, the effect of social trust on foreign bias is stronger if host-country institutions are weak, while it vanishes when the host country is characterized by strong institutions. The informal institution of social trust compensates for the lack of well-functioning formal country-level institutions in international portfolio decisions. Finally, the allocation effect resulting from social trust is different from “blind” trust. The portfolios of high-trust investors exhibit higher cross-country diversification and an enhanced portfolio risk-return trade-off.

KW - Culture

KW - Foreign bias

KW - Information asymmetry

KW - Institutional investors

KW - Portfolio diversification

KW - Trust

KW - Management studies

UR - http://www.scopus.com/inward/record.url?scp=85167974345&partnerID=8YFLogxK

U2 - 10.1016/j.jebo.2023.07.023

DO - 10.1016/j.jebo.2023.07.023

M3 - Journal articles

AN - SCOPUS:85167974345

VL - 214

SP - 233

EP - 269

JO - Journal of Economic Behavior and Organization

JF - Journal of Economic Behavior and Organization

SN - 0167-2681

ER -