Financial education, investor protection and international portfolio diversification

This paper investigates the tension between regulation and financial education in explaining one of the major puzzles in international ?finance, that is the lack of international diversification. We show that both dimensions are relevant: higher investor’s ?financial education fosters international investment and stronger minority investor protection legislation attracts inward investment. More interestingly, these factors appear to be substitute in enhancing investor’s portfolio diversification: the role of financialeducation is particularly pronounced where information problems and monitoring costs are likely to be more severe, that is in countries where protection of minority shareholders’rights is weaker. We interpret this evidence as supportive of the conjecture that the main channel through which financial education contributes to international diversification consists of loosening the informational constraints binding foreign investors.

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