Empirical work, however, finds little support for the result of the ICAPM and documents the existence of a “home bias”--a situation where investors prefer to invest at home rather than abroad. 5 The “home bias” is puzzling because it means that investors are not only foregoing higher returns from investing abroad but they are also holding a portfolio that is not sufficiently diversified. Scholars have argued that a large measure of the home bias can be explained in terms of information asymmetries. Kang and Stulz (1997), for example, document that foreign investors in Japan disproportionally own more shares.
