Taxes, Leverage, and the Cost of Equity Capital

Dhaliwal, Dan S.; Heitzman, Shane; Li, Oliver Zhen

doi:10.2139/ssrn.842024

Cited by 88 publications

(193 citation statements)

References 45 publications

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“…These results are consistent with Predictions 2 and 3. In contrast, while Dhaliwal et al (2005) find evidence that interest deductibility reduces the cost of capital (consistent with Prediction 2), tax rate on capital gains relative to the rate on dividends and interest, it would reduce the implicit tax rate on capital gains even further. (On the other hand, their calculations ignore the high turnover frequently observed for common stocks and mutual funds, which increases the effective tax rate on equity.)…”

Section: Empirical Evidence On Whether Personal Taxes Affectmentioning

confidence: 65%

A Review of Taxes and Corporate Finance

2005

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This paper reviews domestic and multinational corporate tax research. For each topic, the theoretical arguments explaining how taxes can affect corporate decision-making and firm value are reviewed, followed by a summary of the related empirical evidence and a discussion of unresolved issues. Tax research generally supports the hypothesis that high-tax rate firms pursue policies that provide tax benefits. Many issues remain unresolved, however, including understanding whether tax effects are of first-order importance, why firms do not pursue tax benefits more aggressively, and whether corporate actions are affected by investor-level taxes.

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Section: Empirical Evidence On Whether Personal Taxes Affectmentioning

confidence: 65%

A Review of Taxes and Corporate Finance

2005

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“…The Pearson correlation is highest between r gm and r peg at 0.589, and lowest between r gls and r peg at 0.059. As pointed out in Dhaliwal, Heitzman and Li (2006), while all four measures have been used in previous studies as estimates of firm's cost of equity, there appears to be considerable variation in the magnitude of the associations between these variables and individual risk proxies. There is so far no consensus as to which measure is superior as proxy for cost of equity.…”

Section: Resultsmentioning

confidence: 99%

“…More importantly, instead of using cost of equity derived from Value-Line price target projection, I follow Dhaliwal, Heitzman and Li (2006) and construct four different implied cost of equity measures introduced, respectively, by Gebhardt, Lee, and Swaminathan (2001), Claus and Thomas (2001), Gode and Mohanram (2003), and Easton (2004).…”

Section: Signed: ____________________mentioning

confidence: 99%

Income Smoothing, Information Uncertainty, Stock Returns, and Cost of Equity

Chen

2012

SSRN Journal

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“…The results of our replication are reported in Table 5 We then examine changes in the cost of equity capital for converting firms relative to non-converting firms. We estimate the cost of equity as a function of changes in conformity, and a set of controls following Dhaliwal et al (2006). We estimate the following model:…”

Section: Btc (Link 1) > Earnings Informativeness (Link 2) > Cost Of Cmentioning

confidence: 99%

Book-tax conformity and capital structure

2017

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We examine the effect of increased book-tax conformity on corporate capital structure. Prior studies document a decrease in the informativeness of accounting earnings for equity markets resulting from higher book-tax conformity. We argue that the decrease in earnings informativeness impacts equity holders more than debt holders because of the differences in payoff structures between debt and equity investments such that increases in book-tax conformity lead to increases in firms' reliance on debt capital. We exploit a natural experiment in the U.S. and find that firms facing an increase in required book-tax conformity increase leverage relative to other firms. We also provide evidence of an increase in the cost of equity (but not of debt) capital for firms facing an increase in required book-tax conformity relative to control firms and that these increases in cost of equity capital are positively associated with an increase in leverage. Our findings are consistent with firms substituting away from equity and towards more debt in the presence of higher book-tax conformity.

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Taxes, Leverage, and the Cost of Equity Capital

Cited by 88 publications

References 45 publications

A Review of Taxes and Corporate Finance

A Review of Taxes and Corporate Finance

Income Smoothing, Information Uncertainty, Stock Returns, and Cost of Equity

Book-tax conformity and capital structure

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