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Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases

36 Pages Posted: 11 Aug 2012  

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Johannes Voget

University of Mannheim - Accounting and Taxation

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

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Date Written: August 10, 2012

Abstract

In a cross-border takeover, the tax base associated with future capital gains is transferred from target shareholders to acquirer shareholders. Cross-country differences in capital gains tax rates enable us to estimate the discount in target valuation on account of future capital gains. The estimation suggests that a one percentage point increase in the capital gains tax rate reduces the value of equity by 0.225. The implied average effective tax rate on capital gains is 7% and it raises the cost of capital by 5.3% of its no-tax level. This indicates that capital gains taxation is a significant cost to firms when issuing new equity.

Keywords: Capital gains taxation, Cost of capital, International takeovers, Takeover premium

JEL Classification: G32, G34, H25

Suggested Citation

Huizinga, Harry and Voget, Johannes and Wagner, Wolf, Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases (August 10, 2012). Available at SSRN: https://ssrn.com/abstract=2127609 or http://dx.doi.org/10.2139/ssrn.2127609

Harry Huizinga

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Johannes Voget

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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