How Important Are Foreign Ownership Linkages for International Stock Returns?

A large previous literature has examined the relative importance of country and industry effects for international stock returns. We find that there is a third important driver, ownership. We develop a simple measure of international ownership linkages and show that ownership linkages are of similar importance to the traditional country and industry effects. International ownership linkages are not explained by the local or world market, country of capital origin, liquidity, investment style, foreign operations, the level of foreign ownership, or fund flows. We find evidence of the effect being driven by investor habitat and portfolio rebalancing. The specific ownership composition of a stock is an important facet of international equity returns--a finding which has important practical diversification implications.