TY - JOUR
T1 - Tax threat and the disruptive market power of foreign portfolio investors
AU - Andrew, Marshall
AU - Omar, Hisham Farag
AU - Neupane, Biwesh
AU - Neupane, Suman
AU - Thapa, Chandra
PY - 2021/9/13
Y1 - 2021/9/13
N2 - 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.
AB - 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.
KW - Management of Technology and Innovation
KW - Strategy and Management
KW - General Business, Management and Accounting
UR - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3874660
UR - https://www.researchgate.net/publication/354550720_Tax_Threat_and_the_Disruptive_Market_Power_of_Foreign_Portfolio_Investors
UR - http://www.scopus.com/inward/record.url?scp=85114740866&partnerID=8YFLogxK
U2 - 10.1111/1467-8551.12541
DO - 10.1111/1467-8551.12541
M3 - Article
SN - 1045-3172
JO - British Journal of Management
JF - British Journal of Management
ER -