Did the 2003 Tax Act Reduce the Cost of Equity Capital?

56 Pages Posted: 14 Jun 2005

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)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the 2003 Tax Act) drastically reduced shareholder level taxes on equity income. If shareholder level taxation is an important component of cost of equity capital, then cost of equity should decrease after the 2003 Tax Act. Using the approach of Dhaliwal, Krull, Li, and Moser (2005) that relies on estimates of implied cost of equity capital, we find that cost of equity decreased by about 1.02% after the 2003 Tax Act. We also show that for firms largely held by institutional investors to whom the tax rate reduction does not apply, the decline in the cost of equity capital is smaller. These results suggest that the 2003 Tax Act may have achieved its intended goal of lowering the cost of equity capital. They also add further evidence to a more fundamental research question, that is, taxes impact valuation.

Keywords: Implied cost of capital, institutional ownership, dividend taxes, capital gain taxes

JEL Classification: G12, H24, M41

Suggested Citation

Dhaliwal, Dan S. and Krull, Linda K. and Li, Oliver Zhen, Did the 2003 Tax Act Reduce the Cost of Equity Capital? (April 2006). Available at SSRN: https://ssrn.com/abstract=741327 or http://dx.doi.org/10.2139/ssrn.741327

Dan S. Dhaliwal

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 (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Register to save articles to
your library

Register

Paper statistics

Downloads
459
Abstract Views
2,522
rank
36,837
PlumX Metrics