Dividend Taxes and International Portfolio Choice

44 Pages Posted: 16 Apr 2008 Last revised: 19 Jul 2009

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Dhammika Dharmapala

University of Chicago Law School

Date Written: June 2009

Abstract

This paper investigates how dividend taxes influence portfolio choices, using the response to the distinctive treatment of a subset of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. An open-economy after-tax capital asset pricing model is used to derive the hypothesis that JGTRRA should lead to a portfolio reallocation by US investors towards equities in tax-favored countries. A difference-in-difference analysis that compares US equity holdings in affected and unaffected countries finds a substantial portfolio reallocation towards the former. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment, changed tax evasion behavior, or changes in stock prices associated (or contemporaneous) with JGTRRA.

Keywords: Dividends, Portfolio Choice, Taxes, Tax Treaties, Foreign Portfolio Investment

JEL Classification: F21, G11, H24

Suggested Citation

Desai, Mihir A. and Dharmapala, Dhammika, Dividend Taxes and International Portfolio Choice (June 2009). Available at SSRN: https://ssrn.com/abstract=1000680 or http://dx.doi.org/10.2139/ssrn.1000680

Mihir A. Desai

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

Dhammika Dharmapala (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

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