Foreign portfolio equity holdings and capital gains taxation |
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| Institution: | 1. School of Business, Western Sydney University, Penrith, NSW, Australia;2. School of Business, University of the Sunshine Coast, Maroochydore DC, QLD 4558, Australia;3. School of Commerce, University of South Australia, Adelaide, SA 8001, Australia;4. Shanghai Lixin University of Accounting and Finance, Songjiang District, Shanghai, China;1. Department of Applied Informatics, University of Macedonia, 156 Egnatia str., P.O. Box 1591, 54636 Thessaloniki, Greece;2. School of Economics, Business Administration and Legal Studies, International Hellenic University, 14th klm Thessaloniki-Moudania, 57001 Thessaloniki, Greece |
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| Abstract: | Using panel data from 23 developed countries over the 2001–2011 period and employing the Arellano-Bover/Blundell-Bond dynamic panel estimation technique, this paper shows that the source country capital gains tax has a negative and statistically significant impact on foreign portfolio equity holdings. On average, a 1 percentage point increase in capital gains tax rate leads to 0.018% decrease in foreign equity holdings. The negative relationship between the capital gains tax and foreign equity holdings is found to be robust to alternative measures of the source country capital gains tax, inclusion of the dividend imputation tax rate, foreign dividend tax withheld rate, dividend tax credit and other control variables (the source and host country financial wealth, trade, exchange rate volatility, foreign listing and institutional quality). We find that a 1% increase in financial wealth of the source (host) country leads to, on average, a 0.428% (0.427%) increase in foreign equity holdings. An improvement in institutional quality has a positive effect on foreign equity holdings but an increase in the exchange rate volatility has the opposite effect. |
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