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

Research output: Contribution to journalArticleScientificpeer-review

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

Fingerprint

Tax base
Cross-border
Capital gains taxation
Cost of capital
Capital gains
Equity
Tax rate
Shareholders
Capital gains tax
Tax
Country differences
Discount
Effective tax rates
Costs

Keywords

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

Cite this

@article{e0f39a93c7ea42e69654c305091ba06b,
title = "Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of the tax base",
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.",
keywords = "capital gains taxation, cost of capital, international takeovers, takeover premium",
author = "Harry Huizinga and Johannes Voget and Wolf Wagner",
year = "2018",
month = "8",
doi = "10.1016/j.jfineco.2018.04.014",
language = "English",
volume = "129",
pages = "306--328",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier Science",
number = "2",

}

Capital gains taxation and the cost of capital : Evidence from unanticipated cross-border transfers of the tax base. / Huizinga, Harry; Voget, Johannes; Wagner, Wolf.

In: Journal of Financial Economics, Vol. 129, No. 2, 08.2018, p. 306-328.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Capital gains taxation and the cost of capital

T2 - Evidence from unanticipated cross-border transfers of the tax base

AU - Huizinga, Harry

AU - Voget, Johannes

AU - Wagner, Wolf

PY - 2018/8

Y1 - 2018/8

N2 - 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.

AB - 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.

KW - capital gains taxation

KW - cost of capital

KW - international takeovers

KW - takeover premium

U2 - 10.1016/j.jfineco.2018.04.014

DO - 10.1016/j.jfineco.2018.04.014

M3 - Article

VL - 129

SP - 306

EP - 328

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 2

ER -