The benefits of international diversification: market development, corporate governance, market cap, and structural change effects

This paper examines the benefits of international diversification for US investors, while accounting for market development, corporate governance, market cap effects, and structural change across countries over the period August 1996–July 2013. Improved risk adjusted returns are obtained from a dive...

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Bibliographic Details
Published in:International review of financial analysis 2015-12, Vol.42, p.76-97
Main Authors: Switzer, Lorne N., Tahaoglu, Cagdas
Format: Article
Language:English
Subjects:
Business metrics
Corporate governance
Diversification
Economic structure
Emerging markets
Industrialized nations
International diversification
International markets
Portfolio diversification
Portfolio performance
Size effects
Studies
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Summary:This paper examines the benefits of international diversification for US investors, while accounting for market development, corporate governance, market cap effects, and structural change across countries over the period August 1996–July 2013. Improved risk adjusted returns are obtained from a diversified portfolio consisting of a mix of developed and emerging countries. Additionally, we find that diversification benefits are not significant for most of the small-cap foreign assets when an investor already holds a position in corresponding country-large-cap assets. Diversification benefits based on the governance effectiveness of a country's companies are not ubiquitous. We find that economically significant improvements in risk-return performance can be attained by adding large caps of developed countries with high and low overall Governance Metrics International (GMI) ratings and large and small caps of emerging countries with low overall GMI ratings to the investment universe containing the assets of common law developed countries. However, diversification benefits are economically significant only for large and small caps of low GMI emerging countries when short selling is not allowed.
ISSN:1057-5219
1873-8079
DOI:10.1016/j.irfa.2014.11.010