Barriers to portfolio investments in emerging stock markets
The 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
(This abstract was borrowed from another version of this item.)
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:deveco:v:47:y:1995:i:2:p:355-374. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.