Turning local: Home-bias dynamics of relocating foreigners

Abstract

Using comprehensive data from Denmark, we study private investors’ preferences for domestic stocks. We compare the equity home bias of foreigners recently relocated to Denmark to the equity home bias of other investors. We find that home bias of recently relocated foreigners is lower than home bias of other investors. Our main result is that when relocated foreigners’ duration of stay increases, their home bias also increases. After 7–8 years, home bias of relocated foreigners does not differ from home bias of other investors. Our results imply that familiarity with domestic stocks develops dynamically with the length of stay in a given country. We discuss implications for explanations of the home-bias puzzle building on information asymmetries. • Home bias – domestic investors’ tendency to buy stocks of domestic companies – is generally very high among retail investors. • Home bias is lower for foreigners recently relocated to a new country. • Home bias of relocated foreigners increases with their duration of stay in their new country. • Information asymmetry and familiarity that have been used to explain home bias are not static concepts. • 14% of home bias is due to information asymmetry and familiarity.