Did the 2003 Tax Act reduce the cost of equity capital?

Dhaliwal, Dan S.; Krull, Linda K.; Li, Oliver Zhen

doi:10.1016/j.jacceco.2006.07.001

Cited by 107 publications

(41 citation statements)

References 40 publications

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“…Local interest rates on short-term treasury bills serve as our proxy for the returns on the risk-free asset. 5 We start our analyses by confirming prior literature's findings of an on average positive relation between capital gains tax rates and expected returns (e.g., Guenther and Willenborg 1999;Lang and Shackelford 2000;Dhaliwal et al 2007), however not before we eliminate Japan, a country with continuously low risk-free interest rates, from the realized returns tests.…”

Section: Introductionsupporting

confidence: 55%

“…Another set of studies focuses on JGTRRA03 in the United States, which changed both the dividend tax rate (from 38.1 to 15 percent) and the capital gains tax rate (from 20 to 15 percent), and therefore presents less clean of an event. Dhaliwal, Krull, and Li (2007) find a decrease in measures of implied cost of capital following JGTRRA03. 11 All the above studies have in common that they find evidence of a positive relation between capital gains tax rates and expected returns.…”

mentioning

confidence: 88%

“…Prior studies document a positive relation between investor-level capital gains tax rates and expected pretax rates of return (e.g., Guenther and Willenborg 1999;Lang and Shackelford 2000;Dhaliwal, Krull and Li 2007).…”

Section: Introductionmentioning

confidence: 99%

“…It also lets us isolate institutional settings in which the mitigating factors of tax capitalization are most likely to occur. Following prior literature, we use two conceptually different proxies for expected returns: ex ante (realized) buy-and-hold returns (RET) and implied costs of capital (COC) (e.g., Leuz 2006, 2009;Dhaliwal, Li, and Trezevant 2003;Dhaliwal, Krull, Li, and Moser 2005;Dhaliwal, Krull, and Li 2007). 4 We measure both proxies in a way that they capture investors' expected returns at the time of observation.…”

Section: Introductionmentioning

confidence: 99%

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Cross-Country Evidence on the Relation between Capital Gains Taxes, Risk, and Expected Returns

Hail¹,

Sikes²,

Wang³

2014

SSRN Journal

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This study empirically examines the prediction in Sikes and Verrecchia (2012) that the relation between capital gains tax rates and expected rates of return varies in the cross-section and over time with firm risk and market risk. Specifically, we test whether the general positive relation between expected returns and the capital gains tax rate becomes weaker or even reverses when (i) a firm's systematic risk is high, (ii) the aggregate market risk premium is high, or (iii) the risk-free rate is low. Using an international panel from 25 countries over the 1990 to 2004 period, we find evidence supporting these predictions. The results are particularly pronounced in countries with substantive changes in tax rates, a tradition of low tax evasion, less integrated capital markets, and less institutional ownership as well as around substantive changes in the three risk proxies. We corroborate our findings in a single country setting, using the 1978, 1997, and 2003 changes to the capital gains tax rate in the United States as events. Our results underscore the importance of macroeconomic and firm-specific factors in the determination of the effect of capital gains taxes on expected returns and show that the valuation effects can sometimes be in the opposite direction of what is generally expected.JEL Classification: G12, G15, G32, H24, K34, M41

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Section: Introductionsupporting

confidence: 55%

mentioning

confidence: 88%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Cross-Country Evidence on the Relation between Capital Gains Taxes, Risk, and Expected Returns

Hail¹,

Sikes²,

Wang³

2014

SSRN Journal

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“…Our second approach to identify firms that are more likely to have an individual as the marginal investor relies on the hypothesis that as the ownership by a certain investor group increases (e.g., tax-exempt institutions), so does the likelihood that this investor group is the marginal investor. Several authors have made such a claim (Ayers, Cloyd, and Robinson (2002), Bell and Jenkinson (2002), Dhaliwal, Krull, and Li (2007), and Dhaliwal, Krull, Li, and Moser (2005)). For example, if all stocks were held by tax-exempt institutions, the marginal investor would be a tax-exempt institution.…”

Section: The Identity Of the Marginal Investormentioning

confidence: 99%

Taxes and Capital Structure

Faccio

2015

J. Financ. Quant. Anal.

153

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We use nearly 500 shifts in statutory corporate and personal income tax rates as natural experiments to assess the effect of corporate and personal taxes on capital structure. We find both corporate and personal income taxes to be significant determinants of capital structure. Based on ex post observed summary statistics, across Organisation for Economic Co-Operation and Development (OECD) countries, taxes appear to be as important as other traditional variables in explaining capital structure choices. The results are stronger among corporate tax payers, dividend payers, and companies that are more likely to have an individual as the marginal investor.

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