Did the 2003 Tax Act reduce the cost of equity capital?

Dan S Dhaliwal, Linda Krull, Oliver Zhen Li

Research output: Contribution to journalArticle

44 Citations (Scopus)

Abstract

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced shareholder-level taxes on equity income. If shareholder-level taxation is a component of cost of equity capital, then the cost of equity capital should decrease after the Tax Act. We find that the cost of equity capital decreases by 1.02% and that the decline is smaller for firms largely held by institutional investors to whom the tax rate reduction does not apply. These results suggest that the Tax Act lowered the cost of equity capital and add further evidence to the question of whether taxes impact valuation.

Original languageEnglish (US)
Pages (from-to)121-150
Number of pages30
JournalJournal of Accounting and Economics
Volume43
Issue number1
DOIs
StatePublished - Mar 2007

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Cost of equity capital
Tax
Shareholders
Institutional investors
Taxation
Tax relief
Equity
Income
Reconciliation
Tax rate

Keywords

  • Capital gain taxes
  • Dividend taxes
  • Implied cost of capital
  • Institutional ownership

ASJC Scopus subject areas

  • Accounting
  • Economics and Econometrics
  • Finance

Cite this

Did the 2003 Tax Act reduce the cost of equity capital? / Dhaliwal, Dan S; Krull, Linda; Li, Oliver Zhen.

In: Journal of Accounting and Economics, Vol. 43, No. 1, 03.2007, p. 121-150.

Research output: Contribution to journalArticle

Dhaliwal, Dan S ; Krull, Linda ; Li, Oliver Zhen. / Did the 2003 Tax Act reduce the cost of equity capital?. In: Journal of Accounting and Economics. 2007 ; Vol. 43, No. 1. pp. 121-150.
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