Tax threat and the disruptive market power of foreign portfolio investors

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

Research output: Contribution to journalArticlepeer-review


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 set-up, exploiting a significant exogenous tax reform and using unique FPIs' transaction-level data, are consistent with these theoretical expectations.
Original languageEnglish
Number of pages56
JournalBritish Journal of Management
Early online date13 Sep 2021
Publication statusE-pub ahead of print - 13 Sep 2021


  • foreign portfolio investments
  • tax threat
  • market withdrawal
  • disfuptive implications
  • policy reversal


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