Exploring the interaction between auditing and reporting standards and governance in explaining home bias

Abstract

This study investigates both the individual and interaction effects of the Strength of Auditing and Reporting Standards (SARS) and governance on home bias across 53 countries participating in the Coordinated Portfolio Investment Survey (CPIS) from 2012 to 2019. Drawing on publicly available data, we employ a range of statistical methods to conduct a comprehensive assessment of the key determinants of home bias. The findings reveal a significant negative association between SARS and home bias, indicating that stronger auditing and reporting standards help reduce investors’ domestic preference. Governance exhibits heterogeneous effects depending on the legal system, with notable interaction patterns between SARS and governance in civil law and mixed legal system countries. The analysis also highlights the role of cultural distance and business confidence in shaping these relationships, underscoring the multifaceted nature of home bias. These results suggest that policymakers should enhance auditing and reporting standards and reinforce governance frameworks to lower perceived risks and attract foreign investment. By establishing a clear conceptual link between SARS and home bias, this study contributes novel insights to the literature.