Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of the tax base
Huizinga,Harry Voget,Johannes Wagner,Wolf
Huizinga,Harry
Voget,Johannes
Wagner,Wolf
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.
Description
Date
2018-08
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
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Journal Issue
Keywords
capital gains taxation, cost of capital, international takeovers, takeover premium, G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill, G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance, H25 - Business Taxes and Subsidies
Citation
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, vol. 129, no. 2, pp. 306-328. https://doi.org/10.1016/j.jfineco.2018.04.014
License
info:eu-repo/semantics/closedAccess