Tax and the Cost of Equity Capital: An International Analysis

45 Pages Posted: 28 Feb 2014 Last revised: 4 Jun 2014

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Linda K. Krull

University of Oregon

Oliver Zhen Li

National University of Singapore (NUS)

Date Written: June 3, 2014

Abstract

This paper investigates the association between taxes and the cost of equity capital in an international setting that allows for exogenous, cross-sectional variation in corporate and investor tax rates. Using a sample of firms from 33 countries over a 21-year period, we find that the cost of equity capital increases in leverage. This effect decreases in the corporate tax rate as well as the personal tax penalty on interest income relative to equity income, though the significance of this latter result is sensitive to model specification. Further, we find that the cost of equity capital increases in tax penalized dividend income and that cross-border equity investments affect the relation between taxes and the cost of equity capital. In sum, we offer further and confirming evidence, in an international setting, that taxes impact the cost of equity capital.

Keywords: Dividend tax, leverage, cost of capital

JEL Classification: F23, G35, H25, H24

Suggested Citation

Dhaliwal, Dan S. and Krull, Linda K. and Li, Oliver Zhen, Tax and the Cost of Equity Capital: An International Analysis (June 3, 2014). Available at SSRN: https://ssrn.com/abstract=2402009 or http://dx.doi.org/10.2139/ssrn.2402009

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Linda K. Krull (Contact Author)

University of Oregon ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States
541-346-3252 (Phone)

Oliver Zhen Li

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

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