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

38 Pages Posted: 2 Oct 2012

See all articles by Harry Huizinga

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)

Multiple version iconThere are 2 versions of this paper

Date Written: September 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. 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 (September 2012). Available at SSRN: https://ssrn.com/abstract=2155521

Harry Huizinga (Contact Author)

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)

London
United Kingdom

Johannes Voget

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Wolf Wagner

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2
Abstract Views
913
PlumX Metrics