Sub-optimal international portfolio allocations and cost of capital

Frank Kwabi, Robert Faff, Andrew Marshall, Chandra Thapa

Research output: Contribution to journalArticle

2 Citations (Scopus)
8 Downloads (Pure)

Abstract

Finance theory suggests that the sub-optimal international portfolio investment bias of home and foreign investors should affect the cost of capital of a country through its influence on the degree of international market integration/segmentation. Using four unique proxies of aggregate market level cost of capital measures and three different measures of sub-optimal international equity portfolio allocations by home and foreign investors, we find compelling evidence supporting the theory that countries which demonstrate higher home bias are associated with higher cost of capital. Similarly, consistent with theory we also find that countries which are favoured by foreign investors, relative to theoretical prescription, are associated with lower cost of capital.
Original languageEnglish
Pages (from-to)41-58
Number of pages18
JournalJournal of Multinational Financial Management
Volume35
Early online date9 Apr 2016
DOIs
Publication statusPublished - 1 Jun 2016

Keywords

  • market integration
  • international capital asset pricing model
  • equity home bias
  • equity foreign bias
  • cost of capital

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