Australia's equity home bias and corporate governance

Abstract

This paper constructs the float adjusted measure of home bias and explores the determinants of Australia’s equity home bias by employing International Monetary Fund’s high quality dataset (2001 to 2005) on cross border equity investment. The paper finds that information asymmetries arising due to countries regulatory and legal environment have significant impact on Australia’s equity home bias. Trade linkages are found to have a significant impact on Australia’s equity home bias. Australian investors exhibit a preference for English speaking and common legal origin countries. Transaction costs, though statistically significant, have a very low value to suggest a minor impact on Australia’s home bias. This paper finds low diversification motives of Australian investors.