Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of the tax base

Harry Huizinga, Johannes Voget, Wolf Wagner

Research output: Contribution to journalArticleScientificpeer-review

1 Citation (Scopus)

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.
Original languageEnglish
Pages (from-to)306-328
JournalJournal of Financial Economics
Volume129
Issue number2
DOIs
Publication statusPublished - Aug 2018

Keywords

  • capital gains taxation
  • cost of capital
  • international takeovers
  • takeover premium

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