National Culture, Economic Institutions, and International Equily Diversification
This paper examines the benefits of an international equity diversification strategy that is based on cross-national cultural differences as proxied by the Kogut and Singh (1988) measure of cultural distance, and while accounting for cross-national institutional quality as proxied by the Kaufman et al. (2010) measures for institutional governance. The study takes a Dutch investors’ perspective and focuses on the period after the recent global financial crisis, from January 2010 until December 2017. Several risk-adjusted economic measures of diversification are derived from portfolios that are constructed and reperformed throughout a series of robustness tests, and that are based on rankings to cultural and institutional differences across a sample of developed and developing countries. Results indicate more portfolio diversification benefits across developed and developing countries when investing in culturally close rather than in culturally distant countries, if an investor considers the unsystematic risk of the portfolio as is represented by portfolio variance. However, results indicate the opposite effect if an investor considers the systematic risk of the portfolio as is represented by portfolio beta; results show more portfolio diversification benefits when investing in culturally distant rather than in culturally close countries across developed and developing countries. Finally, an alternative measure of risk that is based on the lower partial standard deviation is also displayed; however, results for the diversification effects across the sample are inconsistent if this measure is to be used at examining the economic diversification effects.
Faculteit der Managementwetenschappen