Liberalism and Home Equity Bias Evangelos Benos Marek Jochec ISCTE Business School, 2013 Liberalism and Home Equity Bias

Liberalism and Home Equity Bias Preview of Results Countries whose citizens have liberal ideals are less biased toward domestic equity. one stdev increase in the level of economic liberalism --> 5% decrease in home equity bias one stdev increase in the level of social liberalism --> 2% decrease in home equity bias Liberalism and Home Equity Bias

Methodology (in a nutshell) Panel of 30 countries (major developed economies and some developing countries, too), over the period of 25 years. Panel-data regression with: Y-variable: home-bias measure (a standard established in the literature) X-variables: proxy for liberalism, plus standard controls Liberalism and Home Equity Bias

Liberalism and Home Equity Bias Methodology (detail) List of countries: Liberalism and Home Equity Bias

Methodology (detail – cont.) Measure of home equity bias in year t : where Market Cap is the country’s market capitalization, and Domestic Holdings are defined as: where Foreign Assets = the amount invested by residents in foreign equities Foreign Liabilities = the amount invested by foreigners in domestic eqts Liberalism and Home Equity Bias

Methodology (detail – cont.) Measuring Liberalism: We use the responses to specific questions in the World Values Survey (WVS: www.worldvaluesurvey.org). - administered by social scientists in 78 countries, to a minimum of 1,000 individuals per country, over four time periods: 1980-1982, 1990-1992, 1995-1997 and 1999-2001 (since questions are not asked every year, we substitute missing values with past values until an update is available). Liberalism and Home Equity Bias

Methodology (detail – cont.) Measuring Economic Liberalism: Proxied by answers to questions assessing the degree of government involvement in economic affairs. Question’s preamble: “Now I'd like you to tell me your views on various issues. How would you place your views on this scale? 1 means you agree completely with the statement on the left; 10 means you agree completely with the statement on the right; and if your views fall somewhere in between, you can choose any number in between. Sentences:” Question e036: ”Private ownership of business should be increased vs. Government ownership of business should be increased.” Question e037: ”People should take more responsibility to provide for themselves vs. The government should take more responsibility to ensure that everyone is provided for.” we define the measure of economic liberalism of country c in year t ELc,t as a simple average across the individual answers to the two questions (with an inverted scale). Liberalism and Home Equity Bias

Methodology (detail – cont.) Measuring Social Liberalism: Proxied by answers to questions assessing the tolerance of homosoxuality, abortion, and divorce. Question’s preamble: “Please tell me for each of the following statements whether you think it can always be justified, never be justified, or something in between.” (1 = never justifiable; 10 = always justifiable) Question f118: ”Homosexuality” Question f120: ”Abortion” Question f121: ”Divorce” we define the measure of social liberalism of country c in year t SLc,t as a simple average across the individual answers to the three questions. Liberalism and Home Equity Bias

Methodology (detail – cont.) Control variables: CapC = proxy for the transaction barriers in foreign investment (0-1; average of several dummies from IMF Annual Reports on Exchange Arrangements and Exchange Restrictions) MarCapN = sum of the market capitalizations of neighboring countries (proxy for information acquisition cost) Sharpe = Sharpe ratio of the country (used to capture the relative quality of domestic investment opportunities) IMS = % of foreign-born residents (proxy for “familiarity” with foreign capital markets) PAT = an average (inverted) score on question g006 (“How proud are you to be [Nationality]?”) in WVS (following Morse & Shive, 2008) Liberalism and Home Equity Bias

Summary Statistics – home equity bias Liberalism and Home Equity Bias

Summary Statistics – economic liberalism Liberalism and Home Equity Bias

Summary Statistics – social liberalism Liberalism and Home Equity Bias

Summary Statistics – control variables Liberalism and Home Equity Bias

Summary Statistics – correlations Liberalism and Home Equity Bias

Regression Characteristics Country fixed effects Need to control for unobservable country-specific characteristics that potentially affect the level of the home equity bias (e.g. differences in per capita income, literacy, ect.) Time fixed effects Need to control for time-variant characteristics that affect the home equity bias (e.g. development of electronic trading technology, liberalization waves) Liberalism and Home Equity Bias

Liberalism and Home Equity Bias Results Country and time fixed effects specification (the three social liberalism questions and two economic liberalism questions used separately): Liberalism and Home Equity Bias

Liberalism and Home Equity Bias Results Country and time fixed effects specification (the averages of the three social liberalism questions and two economic liberalism questions are used; Panel B shows coefficients and p-values of selected year dummies): Liberalism and Home Equity Bias

Liberalism and Home Equity Bias Results Cross-sectional regression in the spirit of Morse & Shive (with year dummies): our conclusion: although in the cross section patriotism is associated with higher levels of home equity bias, changes in the level of patriotism are associated with changes in the opposite direction of the home equity bias. Liberalism and Home Equity Bias

Liberalism and Home Equity Bias Negative coefficient on Patriotism? Our results do not necessarily contradict those of Morse & Shieve. MS do not include year dummies: They get positive relationship: more patriotism -> more HEB. There may be a general time trend: Something driving both patriotism and HEB, with generally positive relationship (captured by MS). This general time trend (that affects all countries) is captured by our year dummies. Our coefficient on Patriotism captures the incremental effect, “on top of” general time trend: this effect can be negative. Think of increases in disposable income causing optimism; higher optimism leads to more patriotism, higher disposable income leaves more money to invest abroad. Liberalism and Home Equity Bias 19

Dataset variations: LA excluded (5 out of 30 countries) Results similar as before: Minor changes in coefficient values Liberalism and Home Equity Bias

Dataset variations: OECD countries (add gov.expenditures) “GovEx” Summary statistics (numbers in %) Estimation results (20 countries) Liberalism and Home Equity Bias

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