Dividend Taxes and Implied Cost of Equity Capital

Corporate Governance, Commitment to Business Ethics, and Firm Valuation: Evidence from the Korean Stock Market

“…We use the residual earnings model and abnormal earnings growth model to estimate the expected rate of return on equity investment (Baginski and Wahlen, 2003;Claus and Thomas, 2001;Easton, 2004;Easton and Monahan, 2005;Easton and Sommers, 2007;Easton et al, 2002;Gebhardt et al, 2001;Gode and Mohanram, 2003;O'Hanlon and Steele, 2000;Ohlson and Juettner-Nauroth, 2005). A number of studies have used the implied cost of capital that is inferred from the reverse-engineered models to test the link between the required rates of return and relevant factors that may affect them (Cheng et al, 2006;Daske, 2006;Dhaliwal et al, 2005;Easton and Sommers, 2007).…”

Regulation fair disclosure and the cost of equity capital

“…This makes it difficult to control for other factors that may affect the cost of capital, because these factors are typically firm-specific (Easton 2006;Dhaliwal et al 2005). One way to deal with this issue is to use a constant sample, that is, the firm is used as its own control when the cost of capital is compared before and after an event (for example, Daske 2006;Easton 2006).…”

“…When the sample period is long, risk factors could change over time for the same firm; thus using a constant sample is likely inadequate to control for changes in other risk factors. A second limitation of the Easton and Sommers (2007) models is that the number of observations (that is, cost of capital estimates) is greatly reduced and consequently the power of any statistical test will also be reduced (Dhaliwal et al 2005).…”

“…3 Their examination, however, is based on ex post returns. As argued in Dhaliwal et al (2005) and Hail and Leuz (2006), ex post returns are not an appropriate measure of firms' costs of equity capital, because such returns are affected by shocks to firms' growth opportunities and expected growth rates (see also Elton 1999).…”

“…The firm-specific cost of capital estimates are the internal rates of return (IRR) that equate current stock prices to the present values of future earnings or dividends. These models have been widely used in accounting and finance research to examine various factors affecting expected returns (for example, Botosan 1997;Dhaliwal et al 2005Dhaliwal et al , 2007Daske 2006;Hail and Leuz 2006). Following these studies, we use Gebhardt et al (2001) (hereafter GLS model), Claus and Thomas (2001) (hereafter CT model), and Gode and Mohanram (2003) (hereafter GM model) to estimate the firm-specific cost of capital.…”