Tax Threat and the Disruptive Market Power of Foreign Portfolio Investors

British Journal of Management, (Forthcoming)

62 Pages Posted: 8 Jul 2021 Last revised: 12 Aug 2021

See all articles by Andrew P. Marshall

Andrew P. Marshall

University of Strathclyde - Strathclyde Business School

Hisham Farag

University of Birmingham - Birmingham Business School

Biwesh Neupane

Department of Accounting and Finance, University of Strathclyde Business School

Suman Neupane

Griffith University - Department of Accounting, Finance and Economics

Chandra Thapa

University of Strathclyde

Date Written: June 26, 2021

Abstract

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.

Keywords: Foreign portfolio investors, Tax threat, Market withdrawal, Disruptive implications, Policy reversal

JEL Classification: G11, G18

Suggested Citation

Marshall, Andrew P. and Farag, Hisham and Neupane, Biwesh and Neupane, Suman and Thapa, Chandra, Tax Threat and the Disruptive Market Power of Foreign Portfolio Investors (June 26, 2021). British Journal of Management, (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3874660

Andrew P. Marshall

University of Strathclyde - Strathclyde Business School ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom
44 0141 548 3894 (Phone)

Hisham Farag

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Biwesh Neupane

Department of Accounting and Finance, University of Strathclyde Business School

199 Cathedral Street
Glasgow, G4 0QU
United Kingdom

Suman Neupane

Griffith University - Department of Accounting, Finance and Economics ( email )

170 Kessels Road
Nathan, Queensland 4111
Australia

Chandra Thapa (Contact Author)

University of Strathclyde ( email )

16 Richmond Street
Glasgow 1XQ, Scotland G1 1XQ
United Kingdom

HOME PAGE: http://https://www.strath.ac.uk/staff/thapachandradr/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
75
Abstract Views
519
Rank
571,914
PlumX Metrics