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Journal of Accounting Research Vol. 43 No. 5 2005

Dividend Taxes and Implied Cost of Equity Capital

Dan Dhaliwal1; Linda K. Krull2; Oliver Zhen Li3; WILLIAM MOSER4

1 University of Arizona · 2 The University of Texas at Austin · 3 University of Notre Dame · 4 University of Missouri

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.

DOI
10.1111/j.1475-679x.2005.00186.x
Volume
43
Issue
5
Pages
675-708
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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