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Institutions, Corporate Governance and Capital Flows
- Source :
- Journal of International Economics. 96:338-359
- Publication Year :
- 2015
- Publisher :
- Elsevier BV, 2015.
-
Abstract
- Countries with weaker domestic investor protection hold less diversified international portfolios. An equilibrium business cycle model of North-South capital flow with corporate governance frictions between outside investors and corporate insiders explains this phenomenon through two channels. First, weak governance leads to concentrated ownership in the South because international diversification by insiders is penalized by lower stock market valuation. This reduces the float portfolio, or the supply of South assets. Second, weak governance tilts the demand of South outside investors towards domestic assets to hedge labor income risk. This is due to a higher share of labor in income, which increases labor income risk. In addition, the dynamics of investment under insider control leads relative dividend and labor income to be more negatively correlated in the South, making domestic assets a better hedge against local labor income risk. I find that the insider ownership and hedging channels are responsible for at least 29% and 11%, respectively, of the cross-country variation in international diversification. Thus, weak institutions lower international diversification primarily through concentrated ownership of firms, with outsider hedging also playing a quantitatively significant role.
- Subjects :
- Economics and Econometrics
Corporate governance
Diversification (finance)
jel:F21
Financial system
Monetary economics
jel:F41
Investment (macroeconomics)
Insider
jel:G15
Economics
Business cycle
Dividend
Portfolio
Business
Capital flows
Home bias, institutional quality, corporate governance
Empirical evidence
Hedge (finance)
Finance
Subjects
Details
- ISSN :
- 00221996
- Volume :
- 96
- Database :
- OpenAIRE
- Journal :
- Journal of International Economics
- Accession number :
- edsair.doi.dedup.....c8a261426dd64099cd453761dc20d131