 Sub-optimal international portfolio allocations and the cost of capitalFrank Kwabi, Robert Faff, Andrew Marshall and Chandra Thapa Journal of Multinational Financial Management, 2016, vol. 35, issue C, 41-58 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. Keywords: Market integration; International Capital Asset Pricing Model; Equity home bias; Equity foreign bias; Cost of capital (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:35:y:2016:i:c:p:41-58 DOI: 10.1016/j.mulfin.2016.04.001 Access Statistics for this article Journal of Multinational Financial Management is currently edited by I. Mathur and G. G. Booth More articles in Journal of Multinational Financial Management from Elsevier |
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