BARRIERS TO PORTFOLIO INVESTMENTS IN EMERGING STOCK MARKETS

This paper investigates the significance of non-resident taxation and other investment costs in determining equity returns in emerging stock markets. Capital gains taxes on non-residents are shown to significan tly increase required pre-tax equity returns, which is consistent with a generally limited creditability of foreign capital gains taxes in t he capital exporting countries. Most countries tax inflationary as wel l as real capital gains, which means that inflation can have an indepe ndent positive impact on the required equity return. Required returns are shown to decline with the level of stock market development, as me asured by stock market capitalization relative to gross domestic outpu t.