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Investor home bias and sentiment about the country benefiting from the tax revenue

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  • Möhlmann, Axel

Abstract

This paper provides a novel tax behavior explanation for investor home bias. Specifically, we show that investors are reluctant to hold foreign equity with a tax levied by a foreign tax collector. Starting point is the observation that willingness to pay taxes depends on the attributes of the tax collecting country. This relationship indicates a form of country-specific tax behavior: taxpayers respond to country attributes as they indicate cooperative and trustworthy behavior of tax authorities, the government or other taxpayers. We conduct a laboratory investment experiment to explore the effect of sentiment towards different tax collectors, specifically of the view on home country taxation relative to foreign country taxation. The results suggest that investors prefer domestic equity and invest in riskier portfolios in case of a foreign tax rather than a domestic tax on foreign dividend income.

Suggested Citation

  • Möhlmann, Axel, 2013. "Investor home bias and sentiment about the country benefiting from the tax revenue," Journal of Economic Psychology, Elsevier, vol. 35(C), pages 31-46.
  • Handle: RePEc:eee:joepsy:v:35:y:2013:i:c:p:31-46
    DOI: 10.1016/j.joep.2013.01.008
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    Cited by:

    1. Syed Aliya Zahera & Rohit Bansal, 2018. "Do investors exhibit behavioral biases in investment decision making? A systematic review," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 10(2), pages 210-251, May.

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    More about this item

    Keywords

    Tax behavior; Tax compliance; Conditional cooperation; Home bias; Investor sentiment;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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