One of the major puzzles in international finance is the “home equity bias puzzle:” investors hold a smaller amount of foreign equities in their portfolios than that suggested by models of international portfolio diversification. This paper tests the explanation of asymmetric information by investigating the effect of business exposure on portfolio decisions. The underlying mechanism is that business exposure helps local investors to lower attention costs and to process information efficiently. My data of individual portfolios are from a China's brokerage firm; firm data are collected from their quarterly reports. Specifically, I use regional sales distribution as a proxy to represent a firm’s business exposure to investors. The channels for sales to convey information are through individual consumption and employment in local business. Preliminary results show that for firms more than 300 kilometers away from the home city, proximity measures are no longer correlated with portfolio holdings, however, the effect of business exposure persists. This indicates information content in trade may not be negligible.
Available at: http://works.bepress.com/gewei_wang/2/