Tax threat and the disruptive market power of foreign portfolio investors

Marshall Andrew, Hisham Farag Omar, Biwesh Neupane, Suman Neupane, Chandra Thapa

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Abstract

We investigate the equity trading behaviour of foreign portfolio investors (FPIs) and the potential stock market implications during a period of tax treatment uncertainty in the Indian emerging market. Theoretical arguments predict that the trading reactions (entry and exit) of FPIs not only depend on the severity and credibility of the tax reforms, but also on FPIs’ ability to harm the host capital market by their actions. FPIs may promptly and materially exit the host capital market in response to tax policy reforms that impose potential additional costs. Economic arguments also posit that these withdrawals may carry significant negative implications for the host stock market. Further, given FPIs’ experience regarding the questionable credibility of the host country's tax reforms and lingering uncertainty on future tax changes, FPIs may not re-enter the market with the same speed and volume as they exited, once the tax threat has been removed. The findings of our quasi-experimental setup, exploiting a significant exogenous tax reform and using unique FPIs’ transaction-level data, are consistent with these theoretical expectations.
Original languageEnglish
Number of pages31
JournalBritish Journal of Management
Early online date13 Sept 2021
DOIs
Publication statusE-pub ahead of print - 13 Sept 2021

Keywords

  • Management of Technology and Innovation
  • Strategy and Management
  • General Business, Management and Accounting

ASJC Scopus subject areas

  • Business and International Management
  • Finance

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