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Dividend Taxes and Implied Cost of Equity Capital*

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Author

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  • DAN DHALIWAL
  • LINDA KRULL
  • OLIVER ZHEN LI
  • WILLIAM MOSER

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.

Suggested Citation

  • Dan Dhaliwal & Linda Krull & Oliver Zhen Li & William Moser, 2005. "Dividend Taxes and Implied Cost of Equity Capital," Journal of Accounting Research, Wiley Blackwell, vol. 43(5), pages 675-708, December.
    • Handle: RePEc:bla:joares:v:43:y:2005:i:5:p:675-708
    DOI: 10.1111/j.1475-679X.2005.00186.x
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    References listed on IDEAS

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    Replication

    This item has been replicated by:
  • Mingjun Zhou, 2015. "A Replication of “Dividend Taxes and Implied Cost of Equity Capital†(Journal of Accounting Research 2005)," Public Finance Review, , vol. 43(2), pages 235-255, March.

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