Work

Dividend Taxes and Implied Cost of Equity Capital

Year: 2005

Type: article

Abstract: ABSTRACT We estimate firm‐level implied cost of equity capital based on recent advances in accounting and finance research and examine the effect of dividend taxes on the cost of equity capital. We investigate whether dividend taxes affect firms' cost of capital by testing the relation between the implied cost of equity capital and a measure of the tax‐penalized portion of dividend yield, which we define as the product of dividend yield and the dividend tax penalty. The results generally support the dividend tax capitalization hypothesis. We find a positive relation between the implied cost of equity capital and the tax‐penalized portion of dividend yield that is decreasing in aggregate institutional ownership, our proxy for tax‐advantaged investors. The evidence in this study adds to the understanding of the effect of investor‐level taxes on equity value.

Source: Journal of Accounting Research

DOI: 10.1111/j.1475-679x.2005.00186.x

Authors: DAN DHALIWAL, LINDA KRULL, OLIVER ZHEN LI, WILLIAM MOSER

Institutions: University of Arizona, University of Auckland, The University of Texas at Austin, University of Notre Dame, University of Missouri

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3123849752

FWCI: 45.09

Cites: 62

Cited by: 173

Related to: 10