← Search

Journal of Accounting and Economics Vol. 43 No. 1 2007

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

Dan Dhaliwal1,2; Linda K. Krull3; Oliver Zhen Li4

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

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.

DOI
10.1016/j.jacceco.2006.07.001
Volume
43
Issue
1
Pages
121-150
Language
en
Sources
openalex crossref bibtex:phds-export.bib

Cite