2005, Portfolio Preferences of Foreign Institutional Investors

Countries with higher levels of economic development tend to have greater ability to obtain foreign capital. However, our results suggest that the availability of foreign capital also depends on factors other than the country’s economic development and the firm’s financial attributes. After controlling for the country’s level of economic development, we find that firms in countries with stronger shareholder rights and legal framework attract more foreign capital. We also find that foreign institutions allocate more of their assets to firms with better accounting quality. Our results suggest that steps can be taken both at the country and the firm level to create an environment conducive to foreign portfolio investment. The analysis is based on a unique dataset consisting of equity positions of U.S. mutual funds in emerging markets.