Transition Economy and Equity Home Bias: The Case of Vietnam

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Introduction Studies find evidence that investors do not fully take advantage of the benefits of global diversification. Solnik (1974), among others, finds that cross-border diversification of equity portfolios offers potential gains to investors. DeSantis and Gerard (1997) argue that severe U.S. market declines are contagious at the international level and often imply a significant reduction in the expected gains from international diversification. Grauer and Hakansson (1987) suggest that the risk of an investment portfolio can be reduced by incorporating foreign securities, and they find that the gains from including non-U.S. asset categories into the universe of portfolio assets were remarkably large. (1) However, Merton (1987) and Huberman (1999) indicate that investors are more likely to invest in familiar securities. French and Poterba (1991) and Tesar and Werner (1994) show that at the beginning of the 1990s, the proportion of stock market wealth invested domestically was in excess of 90% for the U.S. and Japan and more than 80% for the U.K. and Germany. French and Poterba (1991) find that the reason for the lack of international diversification is the result of investor choices rather than institutional constraints, such as transaction costs and a dividend withholding tax. Coeurdacier and Rey (2013) point out that equity home bias has decreased in developed countries due to the financial globalization trend but still remains high in most countries. It is particularly high in emerging markets. Kang and Stulz (1997) and Dahlquist and Robertsson (2001), among others, have noted that foreign investors prefer high liquidity stocks. We examine the case for equity home bias in Vietnam, a transition economy, with its stock exchanges in the early stages of development. The results show that the effects of political risk, volatility and firm beta on foreign ownership percentages are different for the two exchanges. (2) The Hanoi exchange was established five years after the Hochiminh exchange, but the number of listed firms on it has grown faster than the number of firms listed on the Hochiminh exchange. (3) There is significant equity home bias in Vietnam. Contrary to existing studies, we find that foreign investors in Vietnam tilt their portfolios towards firms with lower market liquidity, (4) as measured by turnover rate. For the largest turnover-rate quintile, foreign ownership percentage is consistently smaller than average foreign ownership percentage, while for the first two smallest turnover-rate quintiles, foreign ownership percentage is generally larger than the average foreign ownership percentage. Dahlquist and Robertsson (2001) summarize implicit and explicit barriers when analyzing potential explanations for the existence of the equity home bias. They provide evidence that foreign investors tend to invest in firms with certain attributes such as large firms, firms with high export sales and firms with high market liquidity, as measured by turnover rate. Chan, Covrig and Ng (2005) argue that the standards of information disclosure in developing countries are not as good as those in developed countries. We argue that, a fortiori, in a frontier market more reliable information is available about a firm after its listing. The firm's age since its IPO directly influences foreign investors' knowledge about that firm. Also, if the firm has been listed longer, this longer existence signals more certainty about its performance. (5) We show that the firm that has been listed longer attracts a significantly higher foreigner ownership percentage. Governmental controls in firms can be classified as a political risk for foreign investors. The economy of Vietnam shares much similarity with that of China. Sun and Tong (2003) indicate that the Chinese government still plays an important role in the reform of SOEs. This study shows that the same can be said of Vietnam. …