Home bias and cross border taxation

This paper considers the impact of cross-border taxation on home bias in equity investment. Withholding taxes on realized capital gains by foreign investors and dividend imputation for domestic investors are statistically significant and robust impediments to cross border equity flows. Dividend withholding tax and double taxation treaty do not significantly influence home bias. Taxation is indicated by tax variables normalized by the variance of the differential returns between foreign and domestic stocks as suggested by a portfolio model and by tax indicators capturing the presence of country and bilateral tax regulations. Estimation is by Arellano-Bover/Blundell-Bond linear dynamic panel-data methods.