Foreign Investments of U.S. Individual Investors: Causes and Consequences

Using thousands of brokerage accounts of U.S. individual investors, we analyze the motivations and consequences of foreign equity investment. We find that diversification is not the only reason that investors trade foreign securities. While wealthier, more experienced investors enjoy an informational advantage and, thus, are more likely to invest overseas and experience good portfolio performance, other investors appear to venture abroad for the wrong reasons. In particular, behaviorally-biased investors often under-use or misuse foreign equity securities and experience poor portfolio performance. Some investors appear to use foreign securities for speculation or to improve upon poor domestic portfolio performance. Address for Correspondence: Warren Bailey, Johnson Graduate School of Management, Cornell University, Sage Hall, Ithaca, NY 14853-6201, 607-255-4627, fax 607-255-4627, [email protected]; Alok Kumar, McCombs School of Business, University of Texas at Austin, 1 University Station, B6600, Austin, TX 78712, 512-232-6824, fax 512-471-5073, [email protected]; and David Ng, Applied Economics and Management, 252 Warren Hall, Cornell University, Ithaca, NY 14853-7801, 607-255-0145, fax 607-255-9984, [email protected]. We thank an anonymous associate editor, two anonymous referees, Susan Christoffersen, Hazem Daouk, Margaret Forster, David Hsieh (the editor), Andrew Karolyi, Jeremy Ko, George Korniotis, Albert Kyle, Rodolfo Martell, Terrance Odean, Dilip Patro, S. Ghon Rhee, Carolina Salva, Sergei Sarkissian, Albert Wang, Ingrid Werner, Xiaoyan Zhang, and seminar participants at 2007 American Finance Association Annual Meeting, Cornell, 2005 Georgia Tech International Finance Conference, Hawaii, York, Bank of Canada, Queen’s, the Second McGill Conference on Global Asset Management, SUNY Binghamton, George Mason, Toronto, and Syracuse for comments and helpful discussions. We also thank Itamar Simonson for making the investor data available to us and Terrance Odean for answering numerous questions about the investor database. We are grateful to Thomson Financial for access to their Institutional Brokers Estimate System (I/B/E/S) provided as part of a broad academic program to encourage earnings expectations research. All remaining errors and omissions are our own. This paper previously circulated as “Venturing Abroad: Foreign Investments of U.S. Individual Investors” and “Home Bias of Individual Investors: Causes and Consequences”. © 2005, 2006, 2007 Warren Bailey, Alok Kumar, and David Ng.