The role of distance and financial development: Evidence from international financial markets

Abstract

This paper analyzes the role of distance and financial development in equity portfolio performance, using panel data on mutual fund holdings in the U.S. stock market from 39 countries. Our paper shows that financial development, represented by financial depth, is positively correlated with returns and returns’ standard deviation. Fund managers from countries with deeper financial markets earn higher returns at the cost of higher risks. This conjecture can be explained by our findings that fund managers from countries with deeper financial markets prefer small and growth stocks.