Sub-optimal international portfolio allocations and the cost of capital

Kwabi, Frank, Faff, Robert, Marshall, Andrew and Thapa, Chandra (2016) Sub-optimal international portfolio allocations and the cost of capital. Journal of Multinational Financial Management, 35 41-58. doi:10.1016/j.mulfin.2016.04.001


Author Kwabi, Frank
Faff, Robert
Marshall, Andrew
Thapa, Chandra
Title Sub-optimal international portfolio allocations and the cost of capital
Journal name Journal of Multinational Financial Management   Check publisher's open access policy
ISSN 1042-444X
1873-1309
Publication date 2016-06-01
Year available 2016
Sub-type Article (original research)
DOI 10.1016/j.mulfin.2016.04.001
Open Access Status Not yet assessed
Volume 35
Start page 41
End page 58
Total pages 18
Place of publication Amsterdam, Netherlands
Publisher Elsevier
Language eng
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.
Keyword Market integration
International Capital Asset Pricing Model
Equity home bias
Equity foreign bias
Cost of capital
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status Non-UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: HERDC Pre-Audit
UQ Business School Publications
 
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Created: Tue, 13 Sep 2016, 02:12:51 EST by Karen Morgan on behalf of UQ Business School