The Cost of Capital in the U.S. And Japan: a Comparison

31 Pages Posted: 19 Jul 2004 Last revised: 12 Sep 2008

See all articles by Albert Ando

Albert Ando

University of Pennsylvania and NBER (Deceased)

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: June 1987

Abstract

This paper uses financial statement data for large samples of U.S. and Japanese nonfinancial corporations to estimate the return to capital in each country for the period 1967-83. Interpreting these as measures of the cost of capital, we find that the before-tax cost of corporate capital was higher for U.S. firms than for their Japanese counterparts, with the average gap potentially as high as 5.8 percentage points. The use of alternative measurement techniques alters the gap slightly but does not alter the basic finding. However, market returns in the two countries were much closer during the same period. Certain potential explanations for the gap in returns are rejected by empirical evidence, including differences in corporate taxation, differences in borrowing and differences in asset mix. This leaves three potential explanations: differences in risk, differences in the tax treatment of individual capital income and imperfections in the international flow of capital

Suggested Citation

Ando, Albert and Auerbach, Alan Jeffrey, The Cost of Capital in the U.S. And Japan: a Comparison (June 1987). NBER Working Paper No. w2286. Available at SSRN: https://ssrn.com/abstract=347057

Albert Ando

University of Pennsylvania and NBER (Deceased)

N/A

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Germany

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