How Important are Foreign Ownership Linkages for International Stock Returns?

We show how a stock return model can be described by measures of distance between stocks along the country, industry, and ownership dimensions. This ownership return dimension is shown to be a continuous summary measure of institutional investor habitat. Empirically, we find that the ownership return is of similar economic importance in explaining international stock returns as country and industry factors, and is not explained by omitted fundamentals or wealth effects. Habitat effects switch around ADR/GDR listings, are strongest for mutual funds, and are not driven by common fund flows, but by discretionary investor choices. The ownership return has important practical implications for asset managers with regards to portfolio diversification