CULTURAL TIGHTNESS-LOOSENESS AND FOREIGN BIAS: HOW CULTURAL NORM DIFFERENCES INFLUENCE INTERNATIONAL PORTFOLIO DIVERSIFICATION

In this study, we examine the impact of differences in cultural tightness loseness between destination and investor countries on foreign bias in international equity allocation. Using data from 29 investor countries and 28 destination countries over the 2001–2022 period, we show that as the destination market is perceived as culturally “looser” compared to the investor’s home market, investors tend to diversify their portfolios less, resulting in an increased foreign bias. Therefore, the difference in cultural tightness loseness between the destination and home country represents a new unfamiliarity variable that explains foreign bias. From a policy perspective, we show that enhancing the informational environment and strengthening insider trading laws reduce the impact of this unfamiliarity variable on foreign bias.

DOI: https://doi.org/10.47743/rebs-2024-2-0002