The Ability of Global Stock Exchange Mechanisms to Mitigate Home Bias: Evidence from Euronext

Abstract

This paper examines the effects on equity Home Bias of two mechanisms adopted by Euronext when it was formed by the merger of four European countries' stock exchanges in 2002. Home Bias is the well-documented tendency of investors everywhere to over-invest in domestic securities relative to optimal portfolio diversification. These two mechanisms are the integration of trading platforms across the four national predecessor exchanges, and the creation of named segments of the new exchange on which firms could voluntarily list by pre-committing to enhanced disclosure and transparency. We test for changes in Home Bias associated with each mechanism by examining changes in domestic and foreign ownership between Euronext firms that joined the named segments and those that did not, controlling for contemporaneous political and financial developments in the Europe Union by including other EU firms as a benchmark. Overall, we find no diminution of Home Bias for the non-segment Euronext firms, but significant increases in all categories of foreign holdings relative to domestic holdings for the segment Euronext firms. Our results indicate that the segmentation mechanism of voluntary pre-commitment to enhanced financial reporting and corporate governance has the potential to reduce Home Bias for firms listed on the integrated global capital markets.