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.
- capital gains taxation
- cost of capital
- international takeovers
- takeover premium
Huizinga, H., Voget, J., & Wagner, W. (2018). Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of the tax base. Journal of Financial Economics, 129(2), 306-328. https://doi.org/10.1016/j.jfineco.2018.04.014