Investor Biases in Japan

Abstract

We examine how foreign and domestic portfolio investors similarly or dissimilarly invest in Japanese firms for the period of 1985-1998. We propose the agency as well as relational explanations of foreign and domestic institutional investor biases. These explanations can explain bias patterns of foreign investors as well as those of domestic institutional investors in Japan; the latter are uniquely different from domestic money managers in other countries. We find that foreign investors over-invest in familiar and prudent firms while domestic institutional investors over-invest in large firms but do under-invest in the prudent in financial ratios. In addition, foreign investors become more export-firm oriented while the opposite time varying pattern is found for domestic institutional investors. Our empirical tests reveal that biases of these two classes of institutional investors do not exactly get subsumed under a common institutional investor bias mainly because of the unique relational factor in Japan.