Dividend taxes and implied cost of equity capital

Dan S Dhaliwal, Linda Krull, Oliver Zhen Li, William Moser

Research output: Contribution to journalArticle

79 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)675-708
Number of pages34
JournalJournal of Accounting Research
Volume43
Issue number5
DOIs
StatePublished - Dec 2005

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Tax
Dividend taxes
Cost of equity capital
Dividend yield
Investors
Institutional ownership
Finance
Penalty
Equity
Cost of capital
Tax capitalization
Testing

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Dividend taxes and implied cost of equity capital. / Dhaliwal, Dan S; Krull, Linda; Li, Oliver Zhen; Moser, William.

In: Journal of Accounting Research, Vol. 43, No. 5, 12.2005, p. 675-708.

Research output: Contribution to journalArticle

Dhaliwal, Dan S ; Krull, Linda ; Li, Oliver Zhen ; Moser, William. / Dividend taxes and implied cost of equity capital. In: Journal of Accounting Research. 2005 ; Vol. 43, No. 5. pp. 675-708.
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