Uncertainty avoidance and investment underdiversification

Abstract

The relationship between the cultural dimension of uncertainty avoidance and investment underdiversification is examined. A theoretical link between uncertainty avoidance and ambiguity is established, that is, cultural uncertainty avoidance captures the aversion attitude towards ambiguity at the national group level, thus, cultural dimension of uncertainty avoidance influences investors’ behavioral biases of home bias and the investment abroad concentration. The empirical results show that investment underdiversification is significantly and positively affected by the degree of uncertainty avoidance and robustness tests support this conclusion. A further analysis reveals that uncertainty avoidance moderates the effects of ambiguity on investment underdiversification, whereas the effects of uncertainty avoidance are mediated by the status quo bias.