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Foreign Investors' Reaction to Reduced Profitability - Does Governance Matter?

The home bias in international portfolios has been explained by foreign investors' exposure to more severe moral hazard problems than domestic investors. A drop in expected returns will increase the likelihood of these hazards, causing foreign investors to react more strongly to profit warnings than domestic investors. In data on profit warnings, intraday trades, and shareholder deposits from the Helsinki Stock Exchange foreign investors are more likely to sell and domestic investors more likely to buy following profit warnings. The extent of foreign investor reaction depends on the level of surprise at the profit warning, perceived information asymmetry, and corporate governance-related indicators. We also consider alternative explanations, foreign investors' sophistication, familiarity of company, information uncertainty and the treatment of the foreign investments as small growth companies.