The influence of cultural norms on international equity allocation

Abstract

We investigate the effect of cultural tightness-looseness on foreign bias in international equity allocation using data for 29 home investor countries and 37 destination countries for the period 2001–2018. We find that investors from a tight (loose) culture will exhibit less (more) portfolio diversification among foreign markets. Further, cultural tightness-looseness moderates the effect of Hofstede’s cultural values on foreign portfolio allocation decisions differently and depending on the cultural dimension analyzed. The consideration of cultural tightness-looseness in the models diminishes the contradictory and inconclusive results regarding the relationships between cultural values and foreign bias from previous studies. These results hold for various robustness checks.