Good public disclosures mitigate local investment bias

IF you live in Hong Kong, are you more likely to invest in China stocks than Indian stocks? If you live in Kuala Lumpur, would you rather invest in Singapore stocks than Indonesia stocks?

There is some evidence that, everything else being equal, investors tend to invest "close to home". Such local bias is exhibited even when investors are choosing among stocks within their own country where there is no legal barrier to investment. For example, California investors prefer to invest in stocks in Californian companies than stocks of Texan companies.

Several reasons account for this. First, because of limited attention span, investors rely on familiarity to screen which stocks to focus on. Stocks whose headquarters are located close to where investors are based are more familiar to them than those located further away. When this occurs, the local stocks are given more weight than less familiar distant stocks.