Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of tax base

Harry Huizinga; Johannes Voget; Wolf Wagner

doi:10.1016/j.jfineco.2018.04.014

Journal of Financial Economics Vol. 129 No. 2 2018

Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of tax base

Harry Huizinga^1,2; Johannes Voget^3,1,4; Wolf Wagner^5,2

¹ Tilburg University · ² Centre for Economic Policy Research · ³ University of Oxford · ⁴ University of Mannheim · ⁵ Rotterdam University of Applied Sciences

open access

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. We estimate that a 1 percentage point increase in the capital gains tax rate reduces the value of equity by around 0.3%, which suggests that the capital gains tax significantly raises firms’ cost of capital. Furthermore, we find that the implied capital gains tax burden is higher at times of high economic growth and low stock market valuation.

DOI: 10.1016/j.jfineco.2018.04.014
Volume: 129
Issue: 2
Pages: 306-328
Language: en
Sources: openalex crossref bibtex:phds-export.bib

Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of tax base

Abstract

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