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Sub-optimal international portfolio allocations and the cost of capital

Author

Listed:
  • Kwabi, Frank
  • Faff, Robert
  • Marshall, Andrew
  • Thapa, Chandra

Abstract

Finance theory suggests that the optimal international equity portfolio investment by home and foreign investors reduces the cost of capital through international risk sharing and capital market integration. However, the empirical evidence is inconsistent with theory as a number of studies show investors exhibit cross-country biases in their international portfolio investments, known as home and foreign biases. In this study we investigate the implications of home and foreign biases on the cost of capital. Using data from 44 countries over the period 2001–2014, we provide strong evidence that countries that experience higher home bias are associated with a higher cost of capital. Similarly, we also find that countries that are more favoured by foreign investors, relative to the theoretical predictions, are associated with a lower cost of capital.

Suggested Citation

  • Kwabi, Frank & Faff, Robert & Marshall, Andrew & Thapa, Chandra, 2016. "Sub-optimal international portfolio allocations and the cost of capital," Journal of Multinational Financial Management, Elsevier, vol. 35(C), pages 41-58.
    • Handle: RePEc:eee:mulfin:v:35:y:2016:i:c:p:41-58
    DOI: 10.1016/j.mulfin.2016.04.001
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    Citations

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    Cited by:

    1. Nathan Lael Joseph & Thi Thuy Anh Vo & Asma Mobarek & Sabur Mollah, 2020. "Volatility and asymmetric dependence in Central and East European stock markets," Review of Quantitative Finance and Accounting, Springer, vol. 55(4), pages 1241-1303, November.
    2. Frank Obenpong Kwabi & Samuel Owusu-Manu & Agyenim Boateng & Ernest-Bruno Ezeani & Min Du, 2022. "Economic policy uncertainty and cost of capital: the mediating effects of foreign equity portfolio flow," Review of Quantitative Finance and Accounting, Springer, vol. 59(2), pages 457-481, August.

    More about this item

    Keywords

    Market integration; International Capital Asset Pricing Model; Equity home bias; Equity foreign bias; Cost of capital;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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