Sub-optimal international portfolio allocations and the cost of capital

Frank Kwabi*, Robert Faff, Andrew Marshall, Chandra Thapa

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

2 Citations (Scopus)
1 Downloads (Pure)

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.

Original languageEnglish
Pages (from-to)41-58
Number of pages18
JournalJournal of Multinational Financial Management
Volume35
DOIs
Publication statusPublished - 1 Jun 2016
Externally publishedYes

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