Dividend Taxes and Implied Cost of Capital

33 Pages Posted: 19 Jan 2004

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)

William J. Moser

Miami University

Date Written: October 2003

Abstract

We estimate firms' implied cost of capital and examine the effects of dividend taxes on this ex ante measure. The results support the dividend tax capitalization hypothesis. We find a positive relation between implied cost of equity capital and dividend yield that is decreasing in aggregate institutional ownership. We further explore the effect of institutional ownership on the dividend tax premium by partitioning institutional owners into groups of homogeneous investors. We find evidence that ownership by certain groups of tax-favored institutions, including insurance companies, endowments, and pensions, decreases the dividend tax premium and that ownership by mutual funds, non-tax-favored institutions, does not significantly affect the dividend tax premium. Although banks do not face the dividend tax penalty that individual investors face, we do not find that the dividend tax premium is decreasing in ownership by banks, contrary to our predictions. We believe that this exploration paves the way for future research that can identify stronger settings within which to examine the effects of institutional owners' tax attributes on the dividend tax premium.

JEL Classification: G12, H24, H25, G35, G21

Suggested Citation

Dhaliwal, Dan S. and Krull, Linda K. and Li, Oliver Zhen and Moser, William J., Dividend Taxes and Implied Cost of Capital (October 2003). 14th Annual Conference on Financial Economics and Accounting (FEA). Available at SSRN: https://ssrn.com/abstract=488086 or http://dx.doi.org/10.2139/ssrn.488086

Dan S. Dhaliwal (Contact Author)

University of Arizona - Department of Accounting (deceased)

Linda K. Krull

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

William J. Moser

Miami University ( email )

2027 Farmer School of Business
800 East High Street
Oxford, OH 45056
United States
513-529-8284 (Phone)

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