Description:
The preference among foreign
institutional investors for large firms is widely
documented. This paper deepens our understanding of
international investments by providing evidence that foreign
institutional investors with broader investment scopes
prefer to invest in firms where they are less prone to
information disadvantages than more specialized ones. In
other words, there is heterogeneity in how information
asymmetries affect investors' portfolio choices.
Theoretically, a model with costly information and
short-selling constraints shows that the broader the
investor's mandate, the smaller the incentives to
gather and process costly information. Empirically, an
analysis of the mutual fund industry in the United States
supports this hypothesis.