Domestic investor protection and foreign portfolio investment

This paper investigates the impact of domestic investor protection on equity cross-border investment. We bring to light the lower sensitivity of foreign investment to destination countries' corporate governance for those investors enjoying a higher degree of investor protection at home. This evidence is consistent with diminishing marginal returns of corporate governance in portfolio choice. Investors benefiting from high levels of rights protection at home recognize that a large fraction of their portfolio, the domestic one, significantly contributes to the optimal level of corporate governance in portfolios. Consequently, these investors are less demanding about this dimension when constructing their foreign portfolios. As an unintended consequence, all other things being equal, assets issued by foreign countries with good investor protection are severely penalized in portfolios held by investing countries featuring higher standards of corporate governance.