Barriers to portfolio investment in emerging stock markets
AbstractThe authors examine to what extent features of the international tax system and indicators of transaction costs affect the required rates of return on emerging stock markets. They show that the capital gains withholding tax levied on foreign portfolio investors increases required pre-tax rates of return. As countries generally do not index their capital gains taxes, it follows that inflation increases the capital gains tax base, as well as the required rate of return on equity. Dividend withholding taxes instead appear not to increase the required pre-tax equity returns significantly. The differing results for capital gains and dividend taxes reflect the fact that foreign investors generally can receive domestic tax credits only for foreign withholding taxes paid on dividends. The return on equity is part of the issuing firm's cost of capital. So, capital gains withholding taxes imposed on nonresidents increase the cost of capital for domestic firms and discourage physical investment. Private investment levels have tended to be low in developing countries in the 1980's. The cost of equity finance in developing countries has gained in importance inthe last decade, as these countries'access to international lending capital has been limited during most of the decade. What do these findings imply for the design of tax policy in relation to foreign portfolio investment in developing countries? The existence of foreign tax credits for dividend taxes paid suggest that a country should tax capital gains more lightly than repatriated dividends - as do Greece, Pakistan, Portugal, and Venezuela. Each of these countries has positive-dividend withholding taxes but no capital gains taxes imposed on non-residents. Colombia and India do the exact opposite: they tax capital gains far more heavily than dividends. Despite what appears optimal, the trend in developing countries is toward lower dividend withholding taxes, with little change in the average level of capital gains taxation
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-155151.
Date of creation: 1995
Date of revision:
Publication status: Published in Journal of Development Economics (1995) v.47, p.355-374
Contact details of provider:
Web page: http://www.tilburguniversity.edu/
Other versions of this item:
- Demirguc-Kunt, Ash & Huizinga, Harry, 1995. "Barriers to portfolio investments in emerging stock markets," Journal of Development Economics, Elsevier, vol. 47(2), pages 355-374, August.
- Demirguc-Kunt, Asli & Huizinga, Harry, 1992. "Barriers to portfolio investments in emerging stock markets," Policy Research Working Paper Series 984, The World Bank.
- Demirguc-Kunt, A. & Huizinga, H., 1993. "Barriers to Portfolio Investments in Emerging Stock Markets," Papers 9341, Tilburg - Center for Economic Research.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cho, D Chinhyung & Eun, Cheol S & Senbet, Lemma W, 1986. " International Arbitrage Pricing Theory: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 41(2), pages 313-29, June.
- Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
- Jorion, Philippe & Schwartz, Eduardo, 1986. " Integration vs. Segmentation in the Canadian Stock Market," Journal of Finance, American Finance Association, vol. 41(3), pages 603-14, July.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- Hietala, Pekka T, 1989. " Asset Pricing in Partially Segmented Markets: Evidence from the Finnish Market," Journal of Finance, American Finance Association, vol. 44(3), pages 697-718, July.
- Eun, Cheol S & Janakiramanan, S, 1986. " A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership," Journal of Finance, American Finance Association, vol. 41(4), pages 897-914, September.
- Stehle, Richard E, 1977. "An Empirical Test of the Alternative Hypotheses of National and International Pricing of Risky Assets," Journal of Finance, American Finance Association, vol. 32(2), pages 493-502, May.
- Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-34, September.
- Laurence Booth, 1987. "The Dividend Tax Credit and Canadian Ownership Objectives," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 321-39, May.
- Huizinga, Harry, 1996.
"The incidence of interest withholding taxes: Evidence from the LDC loan market,"
Journal of Public Economics,
Elsevier, vol. 59(3), pages 435-451, March.
- Huizinga, H.P., 1996. "The incidence of interest withholding taxes: Evidence from the LDC loan market," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73030, Tilburg University.
- Huizinga, H.P., 1994. "The incidence of interest withholding taxes: Evidence from the LDC loan markets," Discussion Paper 1994-95, Tilburg University, Center for Economic Research.
- Huizinga, H., 1994. "The Incidence of Interest Withholding Taxes: Evidence from the LCD Loan Market," Papers 9495, Tilburg - Center for Economic Research.
- Eijffinger, Sylvester C. W. & Huizinga, Harry P. & Lemmen, Jan J. G., 1998.
"Short-term and long-term government debt and nonresident interest withholding taxes,"
Journal of Public Economics,
Elsevier, vol. 68(3), pages 309-334, June.
- Eijffinger, S.C.W. & Huizinga, H.P. & Lemmen, J.J.G., 1996. "Short-Term and Long-Term Government Debt and Nonresident Interest Withholding Taxes," Discussion Paper 1996-88, Tilburg University, Center for Economic Research.
- Harry P. Huizinga & Jan J.G. Lemmen & Sylvester C.W. Eijffinger, 1997. "Short-Term and Long-Term Government Debt and Nonresident Interest Withholding Taxes," FMG Discussion Papers dp275, Financial Markets Group.
- Eijffinger, S.C.W. & Huizinga, H.P. & Lemmen, J.J.G., 1998. "Short-term and long-term government debt and non resident interest witholding taxes," Open Access publications from Tilburg University urn:nbn:nl:ui:12-76575, Tilburg University.
- Andrew Baum & Claudia Murray, . "Understanding the Barriers to Real Estate Investment in Developing Economies," Real Estate & Planning Working Papers rep-wp2011-08, Henley Business School, Reading University.
- Bilson, Christopher M. & Brailsford, Timothy J. & Hooper, Vincent C., 2002. "The explanatory power of political risk in emerging markets," International Review of Financial Analysis, Elsevier, vol. 11(1), pages 1-27.
- Kane, Edward J. & DEC, 1994.
"Difficulties of transferring risk-based capital requirements to developing countries,"
Policy Research Working Paper Series
1244, The World Bank.
- Kane, Edward J., 1995. "Difficulties of transferring risk-based capital requirements to developing countries," Pacific-Basin Finance Journal, Elsevier, vol. 3(2-3), pages 193-216, July.
- Khaled Guesmi & Duc Khuong Nguyen, 2011.
"How strong is the global integration of emerging market regions? An empirical assessment,"
EconomiX Working Papers
2011-9, University of Paris West - Nanterre la Défense, EconomiX.
- Guesmi, Khaled & Nguyen, Duc Khuong, 2011. "How strong is the global integration of emerging market regions? An empirical assessment," Economic Modelling, Elsevier, vol. 28(6), pages 2517-2527.
- Mishra, Anil V & Ratti, Ronald A, 2013. "Taxation of Domestic Dividend Income and Foreign Investment Holdings," MPRA Paper 50601, University Library of Munich, Germany.
- Boyer, Marcel & Cherkaoui, Mouna & Ghysels, Eric, 1997. "L’intégration des marchés émergents et la modélisation des rendements des actifs risqués," L'Actualité Economique, Société Canadienne de Science Economique, vol. 73(1), pages 311-330, mars-juin.
- Wildmann, Christian, 2010. "What drives portfolio investments of German banks in emerging capital markets?," Discussion Paper Series 2: Banking and Financial Studies 2010,04, Deutsche Bundesbank, Research Centre.
- Christian Wildmann, 2011. "What drives portfolio investments of German banks in emerging capital markets?," Financial Markets and Portfolio Management, Springer, vol. 25(2), pages 197-231, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Economists Online Support).
If references are entirely missing, you can add them using this form.