K.U.Leuven - Faculty of Economics and Applied Economics
DTEW - AFI_0704 pages:1-56
Despite of the intuitive idea that corporate governance and transparency are crucial for a country's international appeal, foreign portfolio investors appear to care first and foremost about transparency, predictability and honesty in governments. This is, at least, what our analysis of international portfolio holdings imply. Our estimates indicate that (i)a modest improvement of government corruption, economic policy transparency and especially institutional quality can trigger an economically substantial rise in foreign interest for the stocks of that country; and (ii) an amelioration in country-level governance variables creates signifficantly higher effects on foreign equity demand than an improvement in traditional macro economic policy indicators.