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Foreign bias in equity portfolios: Informational advantage or familiarity bias?

We use the European Central Bank's new and detailed database of European equity holdings by households to test two competing theories of international biases in equity portfolios, that they reflect either informational advantages or familiarity bias. The database allows look-through handling of investments via mutual funds etc, and reveals that home bias is smaller than usually believed. We find that both home bias and foreign bias are positively associated with the Cremers et al (2009) ActiveShare measure and negatively with the fraction of the country sub-portfolio invested via mutual funds, both of which are consistent with information effects rather than familiarity bias.