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Patriotism in Your Portfolio
Adair Morse and Sophie Shive∗
May 9, 2003
ABSTRACT
More patriotic countries and more patriotic regions within the United States hold
smaller foreign equity positions, in the time series and cross section of our data.
The patriotism effect is robust to controls for transaction barriers, risk, and infor-
mation, which constitute the standard explanations for home bias. Adding patrio-
tism explains 12% in the variation of foreign holdings across countries. Economic,
political, and social correlates of patriotism do not explain the effect of patriotism
on the home bias. We estimate that patriotism is responsible for approximately
9-21% of the U.S. home bias and 7-17% of the Canadian home bias.
∗Doctoral Students, University of Michigan Business School Department of Finance. Correspond-
ing author: Adair Morse, 701 Tappan Street, Ann Arbor, MI 48109-1234. Tel. 734-846-0057 Fax.
734-647-8133 E-mail [email protected]. We wish to thank Geert Bekaert, Sugato Bhattacharyya,
Anusha Chari, Artyom Durnev, Herman Kamil, Han Kim, Linda Tesar, Anjan Thakor, Nejat Seyhun,
Parker Shelby, Tyler Shumway, Lu Zheng, Luigi Zingales, and seminar participants at the University
of Michigan’s Departments of Economics and Finance for their valuable comments.
Why do people invest close to home? The phenomenon of observed over-investment
in home markets appears in a numerous incarnations: over-betting on the home sports
teams, over-allocating 401(k) choices to the employer’s stock, and over-investing portfo-
lios toward domestic assets.1 The over-investing in home markets is a puzzle for economic
theory in that well-behaved mean-variance optimizers would normally allocate invest-
ment in proportion to each asset’s risk-return characteristics. Observed behavior is not
consistent with diversification theories. Furthermore, an optimizer who has a personal
interest in a home victory, in the success of her employer, or in the growth of her country
should hedge possible under-performance by betting on the opposing team, shorting the
employer assets, and allocating more assets abroad. Such hedged allocations are rarely
observed.
The existing literature introduces three principal explanations for home bias: transac-
tion barriers, risk, and information asymmetries. A simple explanation has been largely
omitted. Could it be that investor sentiment toward the home country explains part of
the equity home bias? For many, the thought of betting against a home team or shorting
one’s company’s stock and country’s market index may seem awkward. Such would be
representations of sentiment-driven biases. Sentiment toward the home country is the
defining characteristic of patriotism. With the purpose of exploring the role of sentiment
on investment, we test the theory that patriotism can explain a portion of the observed
portfolio selection bias by examining whether the equity home bias is greater for more
patriotic nations.
The economic significance of patriotism has not previously been examined, yet anec-
dotal evidence suggests that patriotism influences investment decisions. We were moti-
vated to study this issue following the events of September 11, 2001. After the terrorist
attacks on Washington and New York, the stock markets remained closed for a week. In
the interim, much speculation ensued as to how far the market would drop; the media
1The sum of the disproportionately large allocation of a country’s aggregate equity investment todomestic assets is known as the equity home bias.
1
advocated that patriots of the country should not sell their stocks upon re-opening of the
market.2 In the subsequent months, patriotic calls shifted to encouraging a re-buying of
stocks. In a November, 2001 Spectrem survey of affluent investors, 52% of respondents
said they would show their patriotism by making investments in U.S. companies.
Why are the patriotic actions of investors significant for the market? The implica-
tions of diversification biases are especially important, since undiversified investors take
unsystematic risk. If a large enough group of investors holds an undiversified position,
the bias may be priced by the market. The notion that investors might heed the call to
patriotic behavior has a clear implication; it seems that patriotism may affect markets.
The contribution of the paper is to explore the role of patriotism in explaining the
equity home bias. Our hypothesis is that more patriotic investors will choose to invest
more of their portfolio at home. In that the effect of patriotism is not in conflict with the
existing explanations, our aim is to assess whether patriotism can significantly explain
variation in foreign equity holdings after controlling for the effects of existing theories.
To test the hypothesis, we use a patriotism measure from the World Values Survey,
conducted by the University of Michigan. The survey asks individuals in 53 countries
whether they are proud to be a resident of their country. Using the average scores to this
question as a measure of patriotism, we show that patriotism is significant in explaining
the weight of foreign equities in the residents’ total equity holdings. A one standard
deviation change in patriotism decreases foreign equity holdings 4%. To control for
endogeneity, patriotism instrumented by percentage of rural population is estimated.
In instrumented results remain significant, and a one standard deviation in patriotism
decreases foreign equity holdings 2%. The significance of patriotism remains after inclu-
sion of controls for the other explanations for home bias. We find some support for risk
and information explanations in our panel, and we find strong support for the trans-
action barriers explanation. After controlling for all of the standard explanations for
2A November 1991 article in Money criticizes the call for a ‘patriot rally’ to prop up the market onthe day it re-opened after the terrorist attacks of September 11, 2001 (Frederick, 2001).
2
home bias, both patriotism and instrumented patriotism explain 12% of the variation in
foreign equity holdings.
To test the robustness of this finding, we consider a within country sample and a
first differences specification. For nine U.S. Census regions, higher patriotism scores
are associated with lower foreign holdings. In the cross-country data, a first difference
across survey years shows that greater increases in patriotism are accompanied by lower
positive changes in foreign holdings.3
It is possible that correlates of patriotism could be driving its effect. We explore vari-
ables capturing economic, political and social correlations with patriotism. For upper
income respondents of each countries, patriotism is most correlated with greater income
disparity, more reported crime, higher trust of the government, less need for discussing
politics, and higher charitable and religious inclinations. These correlates do not negate
the significance of patriotism when included in the full model regression of foreign hold-
ings on patriotism and the standard explanations for the home bias. Charitableness has
explanatory power on foreign holdings beyond its role in patriotism. To test the ro-
bustness of our results, we investigate whether patriotic feelings might be endogenously
determined by past country performance. We find no reduced significance of patriotism
when controlling for past performance. Finally, we estimate that patriotic behavior is
responsible for 9-21% of the U.S. equity home bias, and 7-17% of the Canadian home
bias. We conclude that investor sentiment has a non-negligible role in an individual’s
tendency to invest in the home market.
The remainder of the paper is organized as follows. Section I discusses why investors’
patriotism can affect their equity holdings. Section II introduces our measures of patrio-
tism and of the equity home bias. In Section III our main results are presented showing
patriotism significant in explaining the home bias. Section IV contains a variety of ro-
bustness tests, including tests on the correlates, instrumented patriotism, alternative
3Both of these tests are informal as the data are severely constrained.
3
measures of the explanations, and investor protection explorations. The last section
concludes.
I. Why Might Patriotism Affect Foreign Holdings?
Why might patriotism affect foreign holdings? Patriotic investing is an old and widespread
phenomenon. In the United States, the promotion of war bonds using patriotic rhetoric
dates back at least to the Civil War. To finance the Union effort, the U.S. government
sold war bonds with names and distribution tactics that appealed to the patriotic call.
Since then, the U.S. government has used war bonds to generate cash during times of
country hostilities. For example, after the September 11th attacks, Series I and EE Trea-
sury Bonds were dubbed ‘Patriot Bonds’, and in 2001, their sales rose to $ 6.6 billion, a
43% increase over the previous year (Sulon, 2001). While appeals to patriotism appear
to encourage investment, no study has tested the economic impact of patriotism.
French and Poterba (1991) and Tesar and Werner (1995) empirically document that
investors’ domestic holdings are very high. French and Poterba calculate that U.S.,
Japanese and U.K. investors held 94, 98 and 82 percent of their portfolios in domestic
assets. If one were to take the CAPM literally, each investor would hold the world market
portfolio, thus holding all stocks in proportion to their market capitalization. Taking
into account human capital, which follows the country’s fortunes, investors should invest
even less in their home country (Baxter and Jermann, 1997). Pastor (2000) calculates
that U.S. investors’ belief that their home market is as mean-variance efficient as the
world market (it is not) must be extremely strong to justify the home bias in their
equity holdings. It is not surprising that Obstfeld and Rogoff (2000) categorize the
home bias as one of “the six major international macroeconomics puzzles”. Grinblatt
and Keloharju (2001) find that Finnish investors prefer stocks of Finnish firms, especially
those that communicate in their own language and are operated by Finnish executives.
4
While this is consistent with investors’ possessing additional information about firms
that communicate in one’s own language, it is also consistent with patriotic investing.
No previous study has explored the equity home bias in a behavioral light, although
two closely related puzzles lend themselves well to behavioral theory. We briefly describe
the role of ‘patriotism’ in the sports betting market and in the 401(k) asset allocation
choice. Consider the (illegal) sports betting market and the case of a non-professional
better. If the better is risk averse, expected utility theory predicts that she will hedge
the possibility of low utility from a home team loss by betting on the opposing team.
Contrary to this prediction, individuals tend to bet on their home team, even with un-
favorable odds (Gray and Gray, 1997). Strumpf (2003) observes that illegal bookmakers
charge extra for home team bets to compensate for the additional risk they incur due
to the home bias of their clients. The same betters may be willing to bet on their own
country’s stocks, even with unfavorable returns.
A second related puzzle is the pattern of 401(k) portfolio allocations. People invest
disproportionate amounts of their discretionary 401(k) retirement assets in their own
company’s stocks. For example, Bernartzi (2001) finds that the retirement fund of
Coca-Cola allocated 90% of its value to the firm stock, and employees themselves allocate
76% of their discretionary contributions to Coca-Cola shares. Although a typical large
company is twice as risky as a diversified portfolio, John Hancock Financial Services
(1999) reports that a majority of employees feel that their own company stock is safer
than a diversified portfolio, and only 18% realize that their stock is riskier. In a similar
study, the Vanguard Group (2001) reports that participants see ‘individual stocks’ as
more risky than a diversified equity fund, and their own company stock as less risky.
In a survey conducted by Bernartzi (2001),4 only 16.4% of respondents believed that
their company stock was more risky than a diversified portfolio. This practice strongly
contradicts mean-variance theory; the observed 401(k) allocations fail to diversify away
4This can be found on Morningstar.com.
5
a firm’s unsystematic risk. Even worse, the employer stock is the asset most correlated
with the employees’s human capital, and thus a rational agent should short employer
stock, not hold large quantities of it.
Both utility and behavioral theory can help us understand the home team bias, the
401(k) bias, and the equity home bias. First we consider traditional utility theory. If
the future is not fully discounted and if capital flow is somewhat constrained across bor-
ders, then investing at home may bring future material benefits, such as jobs, improved
infrastructure,5 and benefits from the taxes paid by corporations on the same soil. The
anecdote below highlights the relevance of this point.
A large central bank in an emerging market brought in a new director of thepension fund department who was to choose the portfolio allocations for thefund. After studying the portfolio, the new director approached the headof the central bank with an optimal international diversification strategy.The central bank head quickly rejected the plan, retorting that the fundinvestment was not to leave the country; the country needed the capital forgrowth.
Investment in the home market might generate intangible utility such as the approval
of others and the feeling of contributing to society. It may also reduce regret if the
investment has low or negative returns. If monetary and non-monetary benefits outweigh
diversification benefits, biased investment strategies are rational. Otherwise, they must
be due to an irrational influence. In the case of home team betting, the benefits must be
emotional because the money wagered cannot affect the outcome of the game. According
to Kahneman and Lovallo’s (1993) ‘inside view’, insiders may strongly identify with an
organization and may find it difficult to hold an independent view on the expected
returns to company stock, and investors may have similar trouble evaluating their home
market objectively. An inside view could either elicit overestimation of the mean return
5Huberman (1997) shows that people invest a large portion of their portfolios in their local phonecompany.
6
(optimism)6 or underestimation of the associated risk (overconfidence)7. Of course,
the inside view allows only for such biases toward the entity with which an individual
identifies.
II. Measuring Patriotism and the Equity Home Bias
Patriotism: Love of country; devotion to the welfare of one’s country; the
virtues and actions of a patriot; the passion which inspires one to serve one’s
country.
- Websters’ Dictionary
Measuring patriotism is difficult because its definition is broad, and measures of
individual’s emotions are scarce. The patriotism data come from the University of
Michigan’s World Values Surveys conducted during two periods, 1990-1992 and 1995-
1997.8 Appendix A highlights details of the survey methodology and questions posed.
To measure patriotism, we focus on individuals’ responses to the question:
How proud are you to be [substitute nationality]?
Our measures of patriotism are mean country scores, averaged over individuals’ re-
sponses from 1 (not patriotic) to 4 (very patriotic). Since the more affluent account for
6Tesar and Werner (1995) find that the lack of diversification due to the home bias can be explainedby a 620 to 800 basis point over-estimation of domestic returns. Optimism can feed on itself; investorscan be convinced that their home market is superior and selectively ignore contradictory evidence(cognitive dissonance).
7Overconfidence is explored for example in Odean, (1999) and Barber and Odean, (2000). The “illu-sion of control” (Langer 1975), in which people treat chance events as controllable, may cause investorsperceive lower risk due to their influence on the outcome. There is also evidence that overconfidenceincreases with familiarity (Heath and Tversky 1991).
8The span of years reflects the time range in conducting the survey. Since the majority of countriesin our sample for the first survey range were surveyed in 1990, we use 1990 as the base year for the firstseries. For the second survey, we use 1996 as the base year, reflecting a median and mode of the surveyyears.
7
the majority of stock holdings, we filter the responses to reflect only the upper half of
income earners in each country.9
Table 1 lists the patriotism scores for the two survey time periods, from which we
can draw some key insights. The table is arranged in increasing patriotism order for the
countries in Survey 1 (1992-1993) and Survey 2 (1995-1997). The mean score increased
marginally form 3.21 to 3.30.10 A systematic bias in the pattern of patriotism scores is
not evident in the sample. The 1990-1992 survey does suggest that New World countries
are more patriotic than Old World countries, but the larger 1995-1997 survey results are
more diverse within income and location groupings. It is clear that Western European
countries are less patriotic relative to the rest of the sample.
Our objective is to use the patriotism score to analyze the home bias, specifically
asking whether patriotism predict how much foreign equity each country’s nationals hold
in their total portfolios. The foreign equity holding variable is a weight of foreign equities
in a country’s aggregate equity portfolio. In other words, foreign equity holdings is the
percentage of a residents’ total equity portfolio that is invested abroad.11 We calculate
a weight of foreign holdings relative to total holdings (FEH) as follows:12
FEH =Foreign equity holdings
Market capitalization + Foreign equity holdings − Foreign equity liabilities
Data limitations in the survey and in the availability of foreign holdings restrict our
sample to 29 countries, six of which have data for both 1991 and 1996, resulting in 33 data
points all together. We were concerned that the availability of foreign holdings data was
biased toward large countries. Thus, we perform a Heckman selection test to determine
9In the United States, only 24% of wage earners under $30,000 held stock and 84 percent of Americanswith income over $75,000 hold equities (Langer, 2001). Clearly, the divergence grows even larger forpoorer countries in which disposable income for the poorer half of the population is limited. In theempirical results that follow, the use of the upper income mean of patriotism slightly improves ourresults relative to the full sample mean, but does not change the significance of the patriotism variable.
10For countries participating in both surveys, the average patriotism score increased form 3.25 to3.38.
11Appendix B provides sources for all the variables used in the study.12Our results remain if we simply normalize foreign equity holdings by market capitalization.
8
if the selection of countries explained by GDP or market captialization is exogenous to
the estimation of foreign holdings on patriotism. We fail to reject that country selection
is independent of GDP and market capitalization with respective p-values of 0.94 and
0.13.
This study is biased against finding evidence of patriotic investing, because we test
the hypothesis that investors are only patriotic about their own country, not about
a region or a common market of countries. Since we examine total foreign outward
investment, and not toward which countries the outbound investment is aimed, we do
not determine if citizens are simply investing in a country’s close allies.
Two interesting possibilities arise if we find no relation between patriotism and foreign
equity holdings. The first possibility is that people’s portfolio decisions are not swayed by
emotion towards their country. Since patriotism affects other decisions such as careers
and purchases, and studies in behavioral finance have shown that sentiment affects
investment decisions, this would be an interesting finding. The second possibility is that
patriotic people invest not only in their country but also in the group of countries that
they consider ‘friendly’. Equity cross holdings data would allow us to test which of these
hypotheses is correct. In the next section, we present the patriotism and foreign equity
data and show our key result that patriotism is significant in explaining the panel of
foreign equity holdings.
III. Empirical Results
A. Panel Results
The central finding of the paper is depicted in Figure 1, a plot of the foreign equity
holdings against patriotism. This figure suggests a decreasing linear relation between
pride-patriotism and foreign equity holdings. Patriotism declines as foreign equity hold-
9
ings increase. To support this claim, a simple regression including a dummy for the
1995-1997 survey period shows that patriotism is significant in explaining foreign in-
vestment, with an R-square of 0.22. The result appears as the first regression on Table
II.
Following the terrorist attacks of September 2001, the Boston Globe related a story
of an individual who “wondered what would happen ‘if every red-blooded American...
bought a few shares of their favorite stock on Monday.”13 We test the economic signifi-
cance of our findings. According to our regression coefficient which is very stable across
specifications, a one-unit rise in the patriotism score will cause the foreign holdings in
the total equity position to rise by approximately 11 percentage points. To compare this
to the equity home bias, note that the optimal CAPM portfolio consists of equity in all
countries in proportion to their market capitalization. For example, in 1996 the United
States comprised 33% of the world market capitalization. However, it held 93% of its
equity at home. The difference, or home bias, is 60 percentage points. If, on a scale
from 1 to 4, we can assume that 2.5 is a neutral answer, our regression results estimate
that if the United States were to have a neutral patriotism score, the home bias would
be reduced by 0.16, (a 27% reduction). We are cautious in drawing too much inference
from this result before we explore other explanations.
In the remainder of this section, we control for other variables which may be influ-
encing the source of foreign holdings decisions.
B. Standard explanations for the Home Bias
Four main explanations have been proposed for the equity home bias. The first is that
transactions barriers make it difficult to invest abroad. A second set of studies suggest
that differences in the availability of information explains the home bias. Another line
13The Boston Globe, September 18, 2001
10
of work considers additional risk that may come from investing abroad, potentially out-
weighing diversification benefits. We present our principal variables here, and perform
robustness checks by including other variables in the following section.
B.1. Transactions Barriers
Transaction barriers should negatively affect foreign investment, somewhat like a tax
paid on the absolute value of the holdings of foreign stocks (Stulz, 1981). Unfortunately,
measures of barriers to outward flows or inward repatriation of capital gains and divi-
dends are limited. Hence, we seek measures which may be highly correlated with foreign
equity holdings facilitation.
Chari and Henry (2002) show that when a capital-poor country is liberalized, there
is an infusion of capital from abroad, supporting the theory that liberalization allows
investors to allocate capital optimally between countries. Since liberalizations allow
capital to flow in both directions, the more liberalized countries’ nationals may be more
likely to invest abroad. In studying the effects upon market growth, Bekaert and Harvey
(2000) collect financial liberalization dates of emerging countries. Since all countries in
our sample were ‘liberalized’ by the first survey’s date according to this paper, we use a
dummy variable for capital account liberalization from the IMF Exchange Arrangements
and Exchange Restrictions Annual Report.14 Additional details for these variables ap-
pear in Appendix A. Although our hypothesis is that foreign holdings should decrease
with transactions barriers, it is well known that transactions barriers are likely not the
entire source of the home bias (Cooper and Kaplanis 1994, Tesar and Werner 1995, Er-
runza, Hogan and Hung 2000, Glassman and Riddick 2001 and Fourth, Ahearne, Griever
and Warnock 2001).
14A measure of tariff and non-tariff barriers from the Economist Intelligence Unit (EIU) databaseyields similar results
11
Our regression results appear in Table IV. The coefficient on transactions barriers
is positive and significant. When we add patriotism to the model, both patriotism and
transaction barriers remain significant. We infer that patriotism is an effect separate
from transactions barriers. The low R square on the single variable equations suggests
that transaction barriers alone are not the complete source of home bias, but barriers
appear somewhat economically significant. Table III shows the estimated change in for-
eign holdings for a one standard deviation change in other variables that are significant
in explaining foreign holdings. According to this table, a one-standard deviation change
in the IMF capital account restrictions would change the home bias by 5.5 percent-
age points. Adding transactions barriers to a model with patriotism and variables for
information and risk model improves the R-square by .128.
B.2. Information
Several studies find that differential information about securities contributes to the home
bias.15 Brennan and Cao (1997) develop a model of international equity portfolio in-
vestment flows and show that differential information endowments among investors con-
cerning equity knowledge can affect their investment decisions.
Bhattacharya and Groznik (2002) find that U.S. investment in a particular foreign
country is positively related to the income of the immigrant group from that country liv-
ing in the U.S. Bhattacharya and Groznik infer that immigrants have more information
about their home countries. Information effects are difficult to decipher; the authors
find that the level of investment in foreign countries is unrelated to language or physical
distance, which are the core components of distance gravity measures. It seems that
information regarding investments across borders is not merely a matter of closeness,
but rather a matter of specific country knowledge. Our information results are consis-
15See Huberman (1999), Choe, Kho, and Stulz (2000), Froot, O’Connell and Seasholes (2000), Covaland Moskowitz (1999),(2001), Grinblatt and Keloharju (2001) Bhattacharya and Groznik (2002)
12
tent with this categorization of information as well. However it is worth pointing out
that Bhattacharya and Groznik’s results are also consistent with our patriotism claims.
Immigrants may invest in their countries of origin if that is where loyalties lie.
There has been strong support for the information hypothesis for studies of U.S.
and international investment. To name a few, Coval and Moskowitz (2001) show that
mutual funds earn abnormal returns when they invest in nearby firms. This effect is
more pronounced in small firms that operate out of remote locations, suggesting that the
mutual fund managers have an informational advantage when they invest in these firms.
Choe, Kho, and Stulz (2000) find that in Korean data from 1997 to 1998, domestic in-
dividual investors have a short-lived private information advantage for individual stocks
over foreign investors, but almost no evidence that domestic institutional investors have
such an advantage.
Information about a stock may aid in an understanding of the parameters of the
returns model and of the uncertainties inherent in the model. The comfort of feeling
trust in domestic institutions closely resembles a set of behavioral findings that people
dislike ambiguous situations.16 In particular, people underweight choices of which they
have difficulty understanding the distribution of outcomes.17 We do not attempt to
distinguish between the two explanations related to information: preference for reduced
ambiguity (model risk), and the possession of true information (knowledge about the
model parameters).
To proxy for the information that may be conveyed about foreign firms through the
media, we use the commonly used measure of newspaper circulation per capita 18. We
choose this variable because newspaper circulation is likely to have a similar effect for all
countries, contrary to televisions and internet which may have been scarce ten years ago
in some countries. Table II shows that number of newspapers per capita is significantly
16These findings are summarized by Barberis and Thaler (2002).17Heath and Tversky (1991)18Number of televisions per capita yields the same results
13
and positively related to foreign equity holdings. When we add patriotism to the model,
both remain significant and the coefficients do not change much, suggesting that both
information and patriotism are important in explaining the home bias.
B.3. Risk
An investor may choose to invest abroad to mitigate financial risk. An international
portfolio may provide diversification, although the benefits are not clear because corre-
lations between countries tend to increase in bear markets. Consistent with the CAPM,
we predict that nationals of countries with high financial risk and low correlations with
the world portfolio will choose to invest more abroad, other things equal. Contrary
to this prediction, we find that correlation with the world index is positively related
to foreign holdings. This is likely due to the fact that countries which are integrated
tend to invest more abroad. Table VI shows that a one-standard deviation change in
the correlation with the world would change foreign equity holdings by 5.5 percentage
points. A one standard deviation change in diversification benefits changes our measure
of foreign equity holdings by 3 percentage points. Other variables that proxy for risk
are presented in the Robustness section.
C. Within-Country and Time Series Results
To further investigate the role of patriotism on foreign equity holdings, we study the
six countries that are present for both surveys in our sample. Our hypothesis is that
when patriotism rises, foreign ivestment decreases more (or increases less) than instances
when patriotism falls. Since our data constraints inhibit formal statistical tests, we
simply plot changes in foreign equity holdings against changes in patriotism. Figure 2
shows that while there are only six countries in the sample that have data from both
surveys, foreign investment falls when residents become more patriotic. The figure also
14
suggests that increasing globalism and increasing patriotism characterize the period
between the 1990-1992 survey and the 1995-1997 survey. Germany is the exception in
its decrease in patriotism, potentially because of the economic strains from unification
during the period. The striking result is that even though the entire sample globalized
their portfolios to some degree, Figure 2 shows clearly that countries who experience
more growth in patriotism had less globalization of their portfolios.
We have presented initial results across countries for points in time and across coun-
tries across time. Would patriotism explain portfolio variation within countries? Al-
though we are again data constrained, we obtain patriotism data from the 1995-97
World Values Survey for nine regions in the United States and compare them to foreign
equity holdings reported in the 1997 Survey of Consumer Finances. Since it is difficult
to find household net worth data for these regions, we use household income as a proxy
and normalize foreign holdings by this figure. The results are plotted in Figure 3. The
figure shows that the more patriotic regions of the United States – West South Cen-
tral, Mountain and West North Central – invest the least in foreign equities. Although
one cannot draw statistical conclusions from nine data points, the results support the
hypothesis that even within a single country, more patriotic investors are more home
biased in their investments.
To summarize this first analysis, we find that foreign holdings are inversely related
to patriotism, and investigate whether the patriotism results holds in the presence of
the the standard explanations for the home bias. In the following section, we consider
some tests of the robustness of our results.
IV. Robustness Tests
This section considers some correlates of patriotism that may be behind its effect. Next
we explore whether a common variable explains both patriotism and foreign invest-
15
ment holdings. We also test for the robustness of the patriotism variable against other
measures of transactions barriers, risk, and information. Last, we consider the role of
corporate governance. We find that these tests do not negate the effect of patriotism on
the home bias.
A. Correlates of Patriotism
We investigate what factors relate to a country’s patriotism score. Then, we consider
whether any of these factors drives the patriotism-foreign equity holdings result displayed
in Figure 1. We distinguish three types of possible correlates of patriotism - economic,
political, and social - and examine which ones are significantly related to our patriotism
score.
First we explore factors that may affect residents’ patriotism for economic reasons.
We expect patriotism to decrease with income disparity; high inequality, especially if the
inequality resulted in poverty at the low end, may be viewed as the ineffectiveness of the
state. We use income disparity as measured by the Theil Index from the University of
Texas. We also consider GDP per capita. Partial correlations are reported in Table IV.
Controlling for the survey year, both income disparity and inequality are significantly
correlated with patriotism. Regression results are presented in Table V. Since our data
points are limited and since the variables are all collinear, we only run patriotism against
each variable alone. We find that more income disparity is indicative of more patriotism.
This result is surprising; the ex post intuition is that the upper half of populations are
more patriotic for the populations who have advantaged the most. In other words, since
our measure of patriotism is confined to the upper income half of every population, it
may be that where disparity is high, the upper income groups are benefitting most from
the government and thus are more patriotic.
16
Next, we explore four possible political correlates to patriotism. All of the political
correlates have significant explanatory power. The first two political correlates to patri-
otism are the levels of crime and corruption. Presumably a country with low crime and
corruption levels will have more patriotic residents. Our measure of crime,the number
of murders, robberies or other violent crimes per 100,000 households, is taken from the
1995 World Competitiveness Yearbook. The corruption index is from the Internet Cen-
ter for Corruption Research, University of Goettingen and Transparency International.
Two other possible political correlates to patriotism are from the World Values Survey.
Responses to ‘How much do you trust your national government?’ and ‘How often do
you discuss politics at home?’ capture faith and interest in national politics, respec-
tively. In the latter case, however, a converse argument could be made that political
discussions may be enhanced by a dissatisfaction with the government in power.
Table IV reports that more crime and more corruption are indicative of higher pa-
triotism. The positive association between crime and patriotism remains even after
controlling for country per capital GDP. Corruption is negative and no longer signifi-
cant after including GDP in the regression. We posit that this result may be due to
increased reporting of crime resulting from better law enforcement, or it may be a sign
of economic freedom. Trust of government is positively correlated to patriotism (those
who trust their government tend to be more patriotic); however, the unreported par-
tial correlation is not significant. Discussing politics is significantly negatively related
to patriotism, meaning that those who frequently discuss politics at home tend to be
less patriotic. The inference is that more discussions of politics might be related to
discontentment with the governing powers.
Three possible social correlates to patriotism are the involvement of citizens in char-
itable organizations, the importance of religion, and ethnolinguistic fractionalization
within the population. The first two variables are from the World Values Survey, and
the third is from Easterly and Kraay (1999). Ethnolinguistic fractionalization increases
17
with the number of ethnic groups and languages within a country. We expect more char-
itable and religious populations to be more patriotic, and we expect ethnically diverse
populations to exhibit more loyalty to communities and less national patriotism.
The social section of Table V presents the regression results of patriotism on social
correlates. All of the social correlates are highly significant. More charitable and more
religious people are also more patriotic. Contrary to our prediction, higher ethnolinguis-
tic fractionalization is correlated with higher patriotism. In our sample, ethnolinguistic
fractionalization is correlated with New World Countries. It is unclear whether entholin-
guistic fractionalization is itself the attribute driving this association.
Given that several variables are correlated with patriotism, we are interested in know-
ing whether any one of them is driving the significant explanatory power of patriotism
on foreign holdings. We regress patriotism individually on each of the economic, political
and social correlates, including a survey year dummy variable. Next, we include patrio-
tism and variables to control for the three other possible causes of the equity home bias
in the model to check if the correlate is a driving force behind patriotism’s significant
explanatory power of foreign equity holdings. These results are shown in Table V. Of the
variables listed above, only Charity has explanatory power for foreign equity holdings,
and it does not negate the effect of the patriotism variable.
We conclude from the correlate analysis that patriotism seems to capture a number
of fundamental characteristics of a country’s residents. More religious people are more
patriotic and invest less abroad. We do not draw inference as to what the primal cause
might be. Instead, we show that patriotism is a bundle of properties which may be
influencing portfolio positions.
18
B. Endogeneity
We perform two further robustness checks to determine whether our significant patrio-
tism results are proxying for some omitted variable. First, we test whether patriotism
is endogenous to a country’s equity market performance. We construct the one, three
and ten-year lagged excess market returns for each country in our sample and find that
they do not explain the proportion of foreign equity holdings, either by themselves or
as an offset to patriotism. The lagged returns also do not explain the patriotism score.
Lagged market returns may be a noisy measure of how nationals perceive their home
market’s performance. For this reason, we use the residuals from this regression and find
that the patriotism cross section that is unexplained by lagged returns is still significant
in our analysis.
In that rural populations are insulated more from the influences from the rest of the
world, choose to instrument patriotism with the percentage of the country’s population
that lives in rural areas. The number of people in rural setting will should not be corre-
lated with any omitted variable that is endogenous to patriotism and foreign holdings.
As a first quick test of the appropriateness of our instrument, the correlation between
rural population and the residuals of the full model of foreign holdings on patriotism
and the three standard home bias explanations is not significant at 0.14. In the first
stage of a 2SLS procedure, our instrument significantly covaries with patriotism with an
R-Square of 0.12. Although this R-Square is rather low, the instrumented patriotism is
significant at the 1% level in explaining the Home Bias. The results are presented in
columns 2 and 10 of Table II. In a model of foreign holdings solely on patriotism and
the survey dummy, a Hausman test of the equivalence of the instrumented and the OLS
patriotism coefficients cannot fails to reject. In the full model of foreign holdings on
patriotism, transaction barriers, information and risk, the Hausman test rejects equiva-
lence of the instrumented patriotism coefficient and the OLS coefficient. For this reason,
we calibrate our economic significance results to the use of the instrument.
19
With the OLS patriotism, a one standard deviation change in patriotism would
be associated with a 4% change in foreign holdings percentage. In the instrumented
model, the same change in patriotism is associated with a 2% change in foreign holdings.
Although the economic significance is lowered, a 2% change in foreign holdings relative
to the total equity position is a large impact. For the U.S. and Canada, a shift of
patriotism down to the neutral patriotism score of 2 would explain 9% and 7% of the
home bias. The OLS estimate of the patriotism coefficient explains 21% of the U.S. home
bias and 17% of Canada’s home bias. Finally, we note that inclusion of the instrumented
patriotism in the full model of the standard explanations for the home bias increases
the variation explained of foreign holdings by 11%. This is almost identical to the 12%
increase in R-Squared seen when using the OLS patriotism. The instrumental analysis
concludes that the association of patriotism with foreign equity holdings is very robust
to endogeneity controls.
The second robustness test we undertake is to search for an instrument of patriotism
that is not correlated with economic activity.
C. Alternative Variables
We consider whether alternative measures for transaction barriers, information, and
risk affect the home bias and our patriotism variable. As a further robustness check, we
control for the importance of banks, the extent of development and GDP per capita.
First we consider whether other measures of the existing explanations for the home
bias also explain the effect of patriotism. As alternative control for transactions barriers,
we use a measure of financial restrictions from the EIU Database. Like the IMF variable,
it is positively and significantly related to the extent of equity holdings, but the effect
of patriotism remains.
20
Next, we consider some alternative measures of information available to a country’s
investors. Investors may be more informed if they are ‘close’ to a firm. For example,
it may be more difficult for Japanese investors to learn about foreign investment op-
portunities than for German investors, because Germany is physically close to several
other large capital markets. Hypothesizing that information is negatively affected by
distance, we use three variables to test for the effect of distance. The first is number of
airline departures normalized by population. Air travel is the leading means to travel
abroad, and frequent travel brings people effectively closer to foreign countries where
they can become informed about foreign stocks. Our measure also includes domestic
flights, but the normalization by population (and thus country) size is an attempt to
control for this factor. Airline departures per person are significantly positively related
to foreign investment, suggesting that individuals who travel more often by air invest
more abroad. A one-standard deviation change in airline departures may change foreign
equity holdings by 4.7 percentage points, which is an economic significance similar to
that of television news or transactions barriers.
We also consider two physical distance measures.19 We define proximity over a
domain of all countries B with listed market capitalization as follows:
ProxA = Average
[(MaxDist-DistAB)
MktcapB
Mktcap−A
](1)
Where MaxDist is the maximum distance in between two countries in our sample (we
want to construct a proximity, not a distance variable), DistAB is the distance between
countries A and B, MktcapB is the market capitalization of country B, and Mktcap−A
is the sum of the market capitalizations of all countries excluding A. Table V shows
that this proximity variable is of the right sign - countries that are ‘closer’ using this
variable have higher foreign investment measures - but is not significant. We also employ
a natural measure of distance between a country and the average of all other countries,
19Data for this ‘gravity’ measure is from http://www.macalester.edu/research/economics
21
and it is not significant. We hypothesize that distance may only be important when
comparing local firms to other domestic firms. Since our study is not refined to the level
of Coval and Moskowitz (2001), who have data on individual firms, we are not able to
pick up this distance effect.
We test several financial risk measures for robustness. The first is from Campbell
Harvey’s (1995) Country Risk analysis tables. The study contains several country risk
variables: Credit, Economic, Financial, and Political, but they are pairwise highly corre-
lated (correlation coefficients above .9), so we use only the financial variable. Our second
variable is the Sharpe ratio of the country’s returns, minus the Sharpe ratio of the world
portfolio translated into local currency, to capture exchange rate movements. Sharpe
ratios are constructed with daily returns from the previous year from Datastream and
the one-year LIBOR rate on the last day of the year. If this measure is high, investors
are less likely to gain less from diversifying abroad. Our third variable is the difference
between the variance of stock returns on the local exchange relative to the covariance
of the local exchange with the world market. This is also a measure of diversification
benefits according to the following argument. If markets are segmented, the difference
between the local exchange variance and the covariance between the local and world
markets will be high, and there will be gains from diversification. If this difference is
low, the local market behaves much like the world market, and systematic risk (and the
benefit from diversification) is low.
According to Table VI, both the own country financial risk index, and the measure
of diversification benefits are significant in explaining foreign equity investment. None
of these affects the patriotism variable, and the significance of financial risk disappears
when patriotism is added to the model.
Other variables may be important in explaining the home bias. In this section we
test these variables Following Demirguc-Kunt and Levine (1999) and Zingales (1998),
we include an indicator of whether the economy is bank (relationship) based or market
22
based. Our purpose is to capture investor portfolio choices and not portfolio allocations
by banks. There are competing hypotheses as to the sign of the bank variable. If bankers’
investment choices are less affected by behavioral biases, then the bank coefficient should
be positive and the patriotism coefficient should increase its negativity. Conversely, if
relationship-based systems imply a connection between debt and equity markets, then
the bank variable should be negative. Next, we include an indicator for developing
countries from Demirguc-Kunt and Levine (1999). The holders of foreign equity may
not be representative of domestic investors in developing countries because the state
and large institutions may play a larger role in developing country equity markets. The
developing variable could also capture differences in education, risk, or other factors.
Table ? shows that development is not significant, possibly because of multiple effects
and the low power of an indicator. Finally, we control for GDP per capita. In higher
income countries, a larger proportion of the population invests abroad. We include the
GDP per capita to control for any effects that reflect income in the selection of who
makes the investment decision.
D. Investor Protection
As a final set of robustness checks, we consider the corporate governance environment
of the investing country. Motivation for this section stems from Dahlquist, Pinkowitz,
Stulz and Williamson (2001) (DPSW). DPSW consider the environment of the receiving
country of U.S. outward investment. In particular, they focus on the amount of closely
held shares in a country and the investor protection ratings. The amount of closely
held shares captures the role of the large shareholders in the country in controlling the
market portfolio. Their hypothesis is that closely held percentage measure provides an
indication of the amount of a market available for outside investment. DPSW find that
indeed the closely held measure is consistently positively significant in explaining the
23
U.S. outward investment to that country. Additionally expropriation risk explains a
portion of the variation in investment positions.
In our study, we are focused on the cross-section of investors’ countries rather than
the cross-section of host countries for investment. In DPSW, the governance affects the
amount of inflows of investment. In our study, the overall outflows may be affected by
the governance at home. We construct an average measure of closely held shares for
each country by using the average closely held percentage for a country for all firms in
Worldscope. Then we take the difference between the closely held measure for a country
and the rest of the world average. Table VII presents the result that the closely held
percentage neither increases nor decreases the foreign holdings. Closely held may have
two offsetting effects. On the one hand, the relative percentage of closely held shares may
reflect poorer governance, thus encouraging more foreign investment. Conversely, the
closely measure is a reflection of the investor group for a country. Thus, a higher closely
held percentage may reflect more inward-focused investment if the largest shareholders
are extracting private benefits of control.
To isolate if these governance effects are at work, we follow DPSW and include first
investor protection and then expropriation risk from EIU. Table VII shows that a coun-
try with better investor protection scores and less expropriation risk invest more abroad.
This is inconsistent with the concept that investors flee their own poor governance coun-
tries and is consistent with the hypothesis that a country’s overall investment position
is impacted by inward biases resulting from holding private benefits of control.
V. Conclusion
We test the relation between patriotism and the equity home bias, and find that investors
in more patriotic countries hold smaller foreign equity positions. Similarly, investors in
more patriotic U.S. regions hold less foreign equities. Changes in patriotic behavior
24
are negatively related to changes in foreign equity holdings. This result is robust to
controls for transactions barriers, risk and information, and economic, political and
social correlates of patriotism do not negate the significance of patriotism. We find
strong support for the transaction barriers explanation for the home bias in addition to
patriotism. In our sample, patriotism explains 9-21% of the US home bias and 7-17%
of the Canadian home bias. Additionally, inclusion of patriotism accounts for 12% in
variation of foreign holdings, and a one standard deviation change in patriotism decreases
foreign holdings 2-4%.
Our results are robust to tests of endogeneity. We find that neither instrumenting
patriotism with the percentage of rural population nor including past country index
returns negates the statistical or economic significance of our patriotism result. We also
test for the robustness of the patriotism variable against other measures of transactions
barriers, risk, and information. Last, we consider the role of corporate governance.
Higher investor protection and lower expropriation risk are increasing with foreign equity
holdings. This result is consistent with the hypothesis that domestic investors in poor
governance countries are able to take advantage of private benefits of control. None
of the robustness tests of endogeneity, alternative measures and corporate governance
negates the effect of patriotism on the home bias.
Three implications can be drawn from our study. The first is that irrational behavior
appears to have a large part in explaining the phenomenon that manifests itself in the
home team bias, the 401(k) investment allocations, and the equity home bias. The second
is that non-mean variance optimizing behavior may be a large determinant of investment
decisions. The third implication of this study is that policies aimed at reducing the
home bias may be less successful in countries where investors prefer not to invest abroad
because they are patriotic. Investor education may have an important role in reducing
the home bias. Patriotism results in a winner’s curse in the sense that the person valuing
a stock most highly will ultimately be the highest bidder in any auction. The same theory
25
applies to markets as a whole. The citizens of a country will likely be the highest bidder
for their own country’s assets, thus possibly driving up the price (and capitalization) of
their own market. In a more general equilibrium setting, people invest disproportionately
at home, but a portion of this over-investment is offset by the home biased choices of
other countries. This may push prices upward in more patriotic countries, and downward
in less patriotic countries. Price distortion, however, does not necessarily point to a ”free
lunch” (Barberis, Nicholas and Richard Thaler, (2002). The holding of domestic equities
may enter directly into the utility function. Thus, if one were to hold the mean-variance
portfolio in lieu of the home bias portfolio, one’s utility may be lower. Also, prices
may still be unaffected if there exists a group of deep pocketed arbitrageurs who are
not affected by patriotism and understand the market capitalization biases caused by
countries’ home biases. They can take short (long) positions in a country if domestic
home bias dominates (is subsumed by) the bias of foreign investors choosing not to
invest in that country. This general equilibrium framework leaves avenues for further
exploration of how home bias in general influences the cross section of returns across
countries.
The effect of patriotism may also explain the home bias in consumer products. Lewis
(1999) finds that the equity home bias and the home bias in consumption are linked.
Concurrently, Bennett and Young’s (1999) theoretical model suggests that optimal port-
folios should be biased towards equities in commodities that attract a large share in its
consumption expenditure.20 A future avenue of research will explore whether the ef-
fect of patriotism on the equity home bias comes via consumption choices, and whether
patriotism has the potential to affect prices.
20This is controversial: Uppal’s (1993) theoretical model suggests that it is unlikely.
26
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Appendix A: World Values Survey
The survey is conducted and held by the Inter University Consortium for Political andSocial Research at the University of Michigan. The surveys are designed to enable across-national comparison of values and norms on many topics. Adults 18 and over wereinterviewed face-to-face in 53 countries.
We choose only individuals in the upper half of the income distribution of theircountry. The number of remaining respondents in our sample ranges between 96 and2562 per country. The raw scores are originally 1 for high patriotism and 4 for lowpatriotism, but we subtract them from 5 in order for higher scores to denote higherpatriotism. Other survey variables are subtracted from 5 as well to ease interpretation.
Variable Question Scale
Patriotism “How proud are you to be [insert nationality]?” 1: Very proud
2: Quite proud
3: Not very proud
4: Not at all proud
Religion “Please say, for each of the following, how
important it is in your life. […]Would you say
Religion is…”
4: Very important,
3: Rather important,
2: Not very important
1: Not important at all.
Trust in Government “I am going to name a number of organizations.
For each one, could you tell me how
much confidence you have in them: is it a great
deal of confidence, quite a lot of
confidence, not very much confidence or none at
all? […] The government in [capital city]”
4: A great deal,
3: Quite a lot,
2: Not very much,
1: None at all.
Charity “Now I am going to read off a list of voluntary
organizations; for each one, could you tell
me whether you are an active member, an inactive
member or not a member of that type
of organization? [….] Charitable organization.”
3: Active member,
2: Inactive member,
1: Not a member.
Discuss politics “When you get together with your friends, would
you say you discuss
political matters frequently, occasionally or
never?”
3: Frequently
2: Occasionally
1: Never
Income “Here is a scale of incomes. We would like to
know in what group your household is, counting
all wages, salaries, pensions and other incomes
that come in. Just give the letter of the group your
household falls into, before taxes and other
deductions.”
Income categories coded by
decile for each society, with
1=lowest decile, 10=highest
decile.
Fight “Of course, we all hope that there will not be
another war, but if it were to come to
that, would you be willing to fight for your
country?”
1: No
2: Yes
30
Appendix B: Data Sources
Variable Notation Definition and Source
Flights per 1000
PeopleAIR
World Bank World Development Indicators Database. Count of number of
air departures per person.
Bank vs. Market BANKDemirguc-Kunt and Levine (1999). Rankings are an average of ratios and
range in our sample from negative 2 (market based) to 1 (bank based).
Correlation with
the World CORRWORLD Datastream. Calculated using one lagged year of daily data.
Corruption CORRUPT
University of Goettingen and Transparency International: Internet Center
for Corruption Research. Ranking range from 1 (not corrupt) to 10 (very
corrupt).
Diversification
Risk Reduction DIV_BEN
Datastream. Calculated as variance of country index minus covariance of
the country index with the world market index.
Ethnoliguistic
Fractionalization ETHNOLING
Easterly and Kraay (1999). Measure of linguistic and ethnic group
dispersion ranging from 0 (not very diverse) to 100 (very diverse).
Financial Risk FINRISK Harvey: http://www.duke.edu/~charvey/ Index of financial sector risk
ranging from 0 (low risk) to 100 (high risk). For 1995 only.
Foreign Equity
Holdings FEH
IFS Database. Foreign equity holdings divided by total equity held by
country residents, defined as country market capitalization plus residents’
foreign equity holdings minus foreigners’ equity holdings in the domestic
market.
Foreign Equity
Holdings – U.S. FEH-US
Survey of Consumer Finance (1997). Foreign equity holdings for 9 U.S.
Census regions divided by average region income.
Imports IMPORTS U.N. Comtrade Database. Imports divided by GDP.
Natural Distance NDISTANCE Great Circle. Average distance from a country to 141 other countries.
Newspaper
Circulation NEWSPAPER
World Bank World Development Indicators Database. Circulation of daily
newspapers per 1000 people.
Market Weighted
Proximity PROXIMITY
Great Circle (distance) and Euromonitor (market capitalization). Variable
creating by averaging the difference between the furthest country distance
and all other countries, each weighted by market capitalization.
Capital Account
Liberalization RESTRICTIONS
IMF Capital Account Restrictions from the Exchange Arrangements and
Exchange Restrictions Annual Reports.
Percentage of
Rural Residents RURAL
World Development Indicators. Percentage of population that live in rural
areas.
Tariff and Non-
Tariff Barriers T_NTB
EIU Database. Barrier index ranging from 1 (few barriers) to 5 (many
barriers).
Televisions TV EIU Database. Televisions per capita.
Violent Crime CRIME World Competitiveness Yearbook (1995). Murders, violent crimes and
robberies per 100,000 people in 1993.
31
2.50 3.00 3.50
Patriotism score
0.00
0.10
0.20
0.30
Fo
reig
n e
qu
ity
inve
stm
ent
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
oo
o
o
o
oo
France_1
UK_1
Germany_1
Italy_1
NL_1
Denmark_1
Belgium_1
Spain_1
USA_1
Canada_1
S. Africa_1
Sweden_1
Finland_1
Germany_2
Spain_2
USA_2
Japan_2
S. Africa_2
Australia_2
Sweden_2
Argentina_2
Finland_2
Poland_2
Switz_2
Chile_2
Slovenia_2
Turkey_2
Lithuania_2
Latvia_2
Russia_2
Peru_2
Venezuela_2
Moldova_2
Figure 1. Negative Relation Between Foreign Equity Holdings and Patriotism.The dashed line is the fitted regression line. Countries are shown with labels representingsurvey 1 (1992-1993) or survey 2 (1995-1997).
32
-0.10 0.00 0.10 0.20
Change in Patriotism
0.000
0.025
0.050
0.075
0.100
Ch
ang
e in
Fo
reig
n E
qu
ity
Ho
ldin
gs
oo
o
o
o
o
o
Finland
Germany
South Africa
Spain
Sweden
USA
Figure 2. Negative Relation Between the Change in Foreign Equity Holdings andthe Change in Patriotism. The changes are measured from the 1990-1992 survey to the1995-1997 survey.
33
Midwest: East North Central
Northeast: Middle Atlantic
Northeast: New England
West: Pacific Division
Midwest: North Central
South: South Atlantic
Southeast: South Central
West: Mountain Division
Southwest: South Central
3.70 3.75 3.80 3.85
Patriotism score
0.02
0.04
0.06
0.08
Fo
reig
n E
qu
ity
Ho
ldin
gs
Α
Α
ΑΑ
Α
Α
Α
Α
Α
Figure 3. Negative Relation Between U.S. Regional Foreign Equity Holdings andRegional Patriotism Score The 9-level Census division codes are as follows:
1. Northeast: New England Division (CT, ME, MA, NH, RI, VT)2. Northeast: Middle Atlantic Division (NY, NJ, PA)3. South: South Atlantic Division: (DE, DC, FL, GA, MD, NC, SC, VA, WV)4. South: East South Central Division: (AL, KY, MS, TN)5. South: West South Central Division: (AR, LA, OK TX)6. Midwest: East North Central Division (IL, IN, MI OH WI)7. Midwest: West North Central Division (IA, KS, MN, MO,NE, ND, SD)8. West: Mountain Division (AZ, CO, ID, MT, NV, UT, WY, NM)9. West: Pacific Division (AK, CA, HI, OR, WA)
34
Patriotism High Income
Score Observations
Germany 2.70 441
Netherlands 2.87 394
Belgium 2.95 699
France 3.06 287
Italy 3.10 441
Sweden 3.17 401
Spain 3.18 994
Finland 3.19 481
Denmark 3.23 440
Canada 3.51 895
Slovenia 3.51 186
South Africa 3.52 1096
USA 3.72 524
Average 3.21 560
Patriotism High Income
Score Observations
Germany 2.53 527
Latvia 2.77 457
Lithuania 2.80 646
Japan 2.82 349
Russia 2.89 844
Moldova 2.97 168
Switzerland 2.98 708
Finland 3.39 284
Argentina 3.33 316
Sweden 3.33 465
Spain 3.41 474
Chile 3.46 491
Turkey 3.46 488
Poland 3.64 25
Australia 3.69 803
Peru 3.79 134
USA 3.79 858
South Africa 3.80 2562
Venezuela 3.89 96
Average 3.30 563
Country
Second Wave: 1995-1997
Country
Table I
Patriotism Scores Across Countries
The Patriotism Score refers to the average answer for high income residents of a
country to the question: "Are you proud to be [insert nationality]?".
First Wave: 1990-1992
35
OL
SIV
-ru
ral
OL
SO
LS
OL
SO
LS
OL
SO
LS
OL
SIV
-ru
ral
12
34
56
78
91
0
Pa
trio
tism
-0.1
09
**
-0.0
48
**
*-0
.08
7*
*-0
.09
1*
-0.1
07
**
-0.1
06
**
-0.0
51
**
(2.2
3)
(2.8
4)
(2.0
6)
(1.8
4)
(2.4
8)
(2.5
8)
(2.4
7)
Res
tric
tio
ns
-0.1
15
**
*-0
.10
5*
**
-0.0
84
**
-0.0
62
**
(3.6
4)
(3.4
8)
(2.7
3)
(1.9
1)
New
spa
per
s0
.21
6*
0.1
61
0.0
13
0.0
43
(1.8
5)
(1.3
8)
(0.1
5)
(0.5
0)
Co
rrW
orl
d0
.27
3*
**
0.2
52
**
*0
.12
40
.07
0
(2.9
7)
(3.0
0)
(1.3
8)
0.0
8
Su
rvey
Du
mY
YY
YY
YY
YY
Y
Ob
s3
33
33
33
33
33
32
82
82
82
8
R²
0.2
20
.29
0.3
70
.45
0.1
90
.27
0.3
70
.50
0.6
30
.62
Ha
usm
an
p-v
alu
e0
.17
0.0
3
Ta
ble
II
Est
ima
tio
ns
Sh
ow
ing
Pa
trio
tism
's S
ign
ific
an
ce i
n E
xp
lain
ing
th
e H
om
e B
ias
Dep
end
ent
Va
ria
ble
: F
ore
ign
Eq
uit
y H
old
ing
s
OL
S a
nd I
V e
stim
ates
are
rep
ort
ed f
or
regre
ssio
ns
of
fore
ign e
quit
y h
old
ings
on t
he
pat
rioti
sm s
core
and t
he
stan
dar
d e
xpla
nat
ions
for
hom
e bia
s. F
ore
ign
hold
ings
is t
he
per
centa
ge
of
a co
untr
y's
tota
l eq
uit
y h
old
ings
that
is
fore
ign, ca
lcula
ted f
rom
IF
S d
ata.
P
atri
oti
sm i
s fr
om
the
Worl
d V
alues
Surv
ey a
nd i
s
an i
ncr
easi
ng i
ndex
fro
m 1
to 4
. R
estr
icti
ons
is a
n I
MF
indic
ator
var
iable
of
Cap
ital
Acc
ount
Res
tric
tions.
N
ewsp
aper
s is
the
amount
of
dai
ly c
ircu
lati
on
per
1,0
00 p
eople
fro
m W
orl
d D
evel
opm
ent
Indic
ators
. C
orr
Worl
d i
s a
calc
ula
ted v
aria
ble
of
the
corr
elat
ion o
f a
countr
y's
mar
ket
index
wit
h t
he
rest
of
the
worl
d;
Corr
Worl
d i
s ca
lcula
ted f
rom
dai
ly r
eturn
s fo
r 1 y
ear
pri
or
to t
he
surv
ey d
ate
wit
h D
atas
trea
m d
ata.
In c
olu
mns
2 a
nd 1
0, P
atri
oti
sm i
s in
stru
men
ted b
y t
he
per
centa
ge
of
rura
l popula
tion. T
he
Hau
sman
p-v
alues
res
ult
fro
m t
he
test
that
the
OL
S e
stim
ator
is
a co
nsi
sten
t an
d e
ffic
ient
esti
mat
or
of
the
true
par
amet
er. T
he
null
hypoth
esis
is
that
the
IV c
oef
fici
ent
on p
atri
oti
sm i
s eq
ual
to t
he
coef
fici
ent
on t
he
inst
rum
ente
d p
atri
oti
sm v
arai
ble
. S
ignif
ican
ce a
t th
e 10\%
, 5\%
and 1
\% l
evel
s ar
e in
dic
ated
by *
, ** a
nd *
** r
espec
tivel
y.
T-s
tati
stic
s ar
e re
port
ed i
n
par
enth
eses
.
36
Var
iab
leE
stim
ated
Coe
ffic
ien
t
Ch
ange
in
For
eign
Eq
uit
y H
old
ings
for
1
Sta
nd
ard
Dev
iati
on
Ch
ange
in
Var
iab
le
Ch
ange
in
R²
wh
en
Var
iab
le A
dd
ed t
o F
ull
Mod
el
Pat
riot
ism
-0.1
16-0
.039
0.12
4
Res
tric
tion
s-0
.086
-0.0
410.
128
New
spap
ers
0.12
20.
020
0.00
8
Cor
rWor
ld0.
194
0.03
90.
037
Tab
le I
II
Eco
nom
ic S
ign
ific
ance
of
Pat
riot
ism
an
d S
tan
dar
d E
xpla
nat
ion
s
Mea
sure
s of
eco
nom
ic s
igni
fica
nce
are
expl
ored
in
colu
mns
tw
o an
d th
ree.
Col
umn
two
repo
rts
the
chan
ge i
n
the
perc
enta
ge o
f eq
uity
hol
ding
s th
at a
re f
orei
gn f
or a
one
sta
ndar
d de
viat
ion
chan
ge i
n th
e ro
w v
aria
ble.
The
fin
al c
olum
n sh
ows
the
chan
ge i
n R
-Squ
ared
tha
t oc
curs
whe
n th
e ro
w v
aria
ble
is a
dded
to
the
full
mod
el
of f
orei
gn e
quit
y ho
ldin
gs o
n th
e su
rvey
yea
r du
mm
y, p
atio
tism
, tra
nsac
tion
res
tric
tion
s, n
ewsp
aper
s pe
r
capi
ta, t
he c
orre
lati
on o
f th
e co
untr
y m
arke
t w
ith
the
wor
ld, a
nd G
DP
per
cap
ita.
The
ful
l m
odel
is
defi
ned
to
be a
ll o
f th
e va
riab
les
exce
pt t
he o
ne t
hat
is a
dded
for
cal
cula
ting
the
cha
nge
in R
-Squ
ared
.
37
Patr
iotis
m
1
GD
P/C
ap-0
.25
**1
Ineq
ualit
y0.
40**
*-0
.25
*1
Cri
me
0.41
***
-0.1
9-0
.03
1
Cor
rupt
ion
0.26
*-0
.83
***
0.51
***
0.05
1
Dis
cuss
-0.3
2**
*-0
.01
-0.3
6**
*-0
.02
-0.1
61
Tru
st G
ov0.
180.
110.
070.
24-0
.20
-0.1
71
Eth
nolin
g0.
43**
*-0
.35
**0.
39**
*0.
630.
33**
0.03
0.23
1
Cha
rity
0.23
*0.
31**
0.25
*0.
41**
-0.1
9-0
.02
-0.1
20.
101
Rel
igio
n0.
67**
*-0
.52
***
0.61
***
0.44
***
0.59
***
-0.3
7**
*0.
180.
56**
*0.
18
Tru
st G
ovE
thno
ling
Tab
le IV
Part
ial C
orre
latio
ns, C
ontr
ollin
g fo
r Su
rvey
Yea
r, o
f Pat
riot
ism
and
Eco
nom
ic, P
oliti
cal a
nd S
ocia
l Var
iabl
esPa
rtial
cor
rela
tions
, con
trolli
ng fo
r sur
vey
year
, are
pre
sent
ed fo
r eco
nom
ic, p
oliti
cal,
and
soci
al c
orre
late
s with
pat
riotis
m.
Econ
omic
cor
rela
tes a
re in
com
e an
d
ineq
ualit
y. G
DP/
Cap
is fr
om th
e W
orld
Dev
elop
men
t Ind
icat
ors.
Ineq
ualit
y is
the
Thei
l Ind
ex fr
om th
e U
nive
rity
of T
exas
at A
ustin
. Po
litic
al c
orre
late
s are
crim
e,
corr
uptio
n, d
iscu
ss p
oliti
cs, a
nd tr
ust o
f gov
ernm
ent.
Crim
e is
vio
lent
crim
es p
er 1
00,0
00 p
eopl
e in
199
3 fr
om th
e W
orld
Com
petit
iven
ess y
earb
ook.
Cor
rupt
ion
is th
e
Tran
pare
ncy
Inte
rnat
iona
l Ind
ex in
crea
sing
in c
orru
ptio
n fo
rm 1
to 1
0. D
iscu
ss re
fers
to th
e W
orld
Val
ues S
urve
y qu
estio
n of
how
ofte
n an
indi
vidu
al d
iscu
sses
polit
ics.
Tru
st o
f gov
ernm
ent i
s the
resp
onse
to th
e w
orld
val
ues s
urve
y of
whe
ther
an
indi
vidu
al tr
usts
the
gove
rnm
ent.
Soc
ial c
orre
late
s are
ent
holin
guis
tic
disp
ersi
on, c
harit
y an
d re
ligio
n. E
thno
lingu
istic
dis
pers
ion
is a
n in
dex
from
Eas
terly
and
Kra
ay (1
999)
. C
harit
y is
the
resp
onse
to th
e W
orld
Val
ues S
urve
y qu
estio
n
of c
harit
able
act
ivity
. R
elig
ion
is th
e re
spon
se to
the
Wor
ld V
alue
s Sur
vey
of h
ow re
ligio
us a
n in
divi
dual
rate
s her
self.
Sig
nific
ance
in th
e pa
rtial
cor
rela
tions
is
deno
ted
by *
, **,
and
***
for t
he 1
0%, 5
% a
nd 1
% le
vels
resp
ectiv
ely.
Patr
iotis
mG
DP/
Cap
Ineq
ualit
yC
rim
eC
hari
tyC
orru
ptio
nD
iscu
ss
38
1 2 3 4 5 6 7 8
Patriotism -0.115 ** -0.092 * -0.122 ** -0.116 ** -0.112 ** -0.134 ** -0.165 *** -0.133 **
(2.67) (1.79) (2.41) (2.75) (2.66) (2.39) (3.62) (2.15)
Restrictions -0.087 ** -0.079 ** -0.083 ** -0.073 ** -0.097 ** -0.088 ** -0.079 ** -0.087 **
(2.77) (2.45) (2.71) (2.19) (2.77) (2.69) (2.71) (2.75)
Newspaper 0.1284 -0.045 -0.083 -0.102 0.001 0.042 0.031 0.060
(0.73) (0.43) (0.90) (0.85) (0.02) (0.38) (0.36) (0.50)
CorrWorld 0.1924 -0.126 -0.050 -0.090 0.103 0.103 0.008 0.127
(1.50) (1.36) (0.47) (0.97) (1.09) (0.99) 0.09 (1.40)
GDP/Cap -2.730
(0.76)
Inequality 0.002
(0.47)
Crime 0.277
(1.05)
Corruption -0.015
(1.42)
Discuss -0.075
(0.78)
Enthnoling 0.483
(0.59)
Charity 0.274 **
(2.39)
Religion 0.033(0.59)
Survey Dum Y Y Y Y Y Y Y Y
Obs 28 27 25 27 28 26 26 28
R2
0.64 0.60 0.67 0.66 0.64 0.62 0.70 0.63
Table V
Regressions Showing the Patriotism Result is Not Driven Solely by Correlates
OLS estimates are reported for regressions of foreign equity holdings on the patriotism score and significant patriotism correlates.
Foreign holdings is the percentage of a country's total equity holdings that is foreign, calculated from IFS data. Patriotism is from the
World Values Survey and is an increasing index from 1 to 4. Restrictions is an IMF indicator variable of Capital Account Restrictions.
Newspapers is the amount of daily circulation per 1,000 people from World Development Indicators. CorrWorld is a calculated variable
of the correlation of a country's market index with the rest of the world; CorrWolrd is calculated from daily returns for 1 year prior to the
survey date with Datastream data. GDP/Cap is GDP (in millions) per capita from World Development Indicators. Crime isviolent
crimes per 100,000 people in 1993 from the World Competitiveness yearbook. Corruption is the Tranparency International Index
increasing in corruption form 1 to 10. Discuss refers to the World Values Survey question of how often an individual discusses politics.
Enthnoling is the enthnoliguistic dispersion from Easterly and Kraay (1999). Charity and Religion are World Values Survey questions
asking whether the individual participates in charitable and religious activity. Significance at the 10\%, 5\% and 1\% levels are
indicated by *, ** and *** respectively. T-statistics are reported in parentheses.
39
1 2 3 4 5 6 7 8
Patriotism -0.148 *** -0.097 * -0.136 *** -0.101 * -0.106 * -0.125 ** -0.108 ** -0.144 **
(2.89) (1.96) (3.05) (1.74) (1.88) (2.61) (2.17) (2.57)Barriers
T_NTB 0.051
(2.04) *Information
TV/Cap 0.206 *
(1.79)
AirDepart 0.005 ***
(2.96)
Proximity 0.168
(0.29)
NDistance 0.001
(0.12)Risk
DivBene -5.770
(1.56)
Sharpe -0.168
(0.17)
FinRisk -0.005 *
(1.75)
Survey Dum Y Y Y Y Y Y Y Y
R2
0.39 0.31 0.40 0.22 0.22 0.38 0.22 0.42
Obs 29 32 33 33 33 28 33 33
Table VI
Robustness Regressions: Patriotism's Significance with Other Measures of Home Bias ExplanationsOLS estimates are reported for regressions of foreign equity holdings on patriotism and alternative measures of transaction
barriers, information and risk. Foreign holdings is the percentage of a country's total equity holdings that is foreign,
calculated from IFS data. Patriotism is from the World Values Survey and is an increasing index from 1 to 4. T_NTB is
an index of tariff and nontariff barriers from the EIU. Televisions per capita is also from EIU. AirDepart is the number of
flight departures per person from World Development Indicators. Proximity is a average market weighted distance to all
other countries. The natural distance measure is from Great Circle. DiveBene is diversification benefits calculated as
varaince of a country index minus the covaraince with the world market index. Sharpe is the country index Sharpe ratio
calculated from Datastream data. Finrisk is Cambel Harvey's index of financial sector risk. Significance at the 10\%, 5\%
and 1\% levels are indicated by *, ** and *** respectively. T-statistics are reported in parentheses.
40
1 2 3 4 5 6
Patriotism -0.228 *** -0.141 ** -0.155 ***
(3.22) (2.74) (2.99)
Closely 0.0899 -1.811
(0.04) (0.97)
InvestProt 0.0393 ** 0.0341 **
(2.22) (2.14)
Expropriate 0.072 0.074 *
(1.61) (1.88)
Survey Dum Y Y Y Y Y Y
Obs 22 22 29 29 29 29
R² 0.06 0.40 0.21 0.39 0.15 0.37
Dependent Variable: Foreign Equity Holdings
Table VII
Patriotism and the Role of Corporate Governance for Foreign Holdings
OLS estimates are reported for regressions of foreign equity holdings on the patriotism score and
corporate governance measures. Foreign holdings is the percentage of a country's total equity holdings
that is foreign, calculated from IFS data. Patriotism is from the World Values Survey and is an
increasing index from 1 to 4. Closely is the average percentage of closely held shares for all
Worldscope country firms minus the average closely held percentage from the rest of the world.
Investor protection and expropriation risk are from EIU; both of these measures are increasing in better
protection.
41