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Dividend Taxes and Implied Cost of Equity Capital


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    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. Copyright 2005 The Institute of Professional Accounting, University of Chicago.

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    Article provided by Wiley Blackwell in its journal Journal of Accounting Research.

    Volume (Year): 43 (2005)
    Issue (Month): 5 (December)
    Pages: 675-708

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    Handle: RePEc:bla:joares:v:43:y:2005:i:5:p:675-708

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    Cited by:
    1. Hou, Kewei & van Dijk, Mathijs A. & Zhang, Yinglei, 2012. "The implied cost of capital: A new approach," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 504-526.
    2. Jin Ginger Wu & Lu Zhang, 2010. "Does Risk Explain Anomalies? Evidence from Expected Return Estimates," NBER Working Papers 15950, National Bureau of Economic Research, Inc.
    3. Norio Kitagawa & Masatoshi Gotoh, 2011. "Implied Cost of Capital over the Last 20 Years," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 1, pages 71-104, December.
    4. Zhonglan Dai & Edward Maydew & Douglas A. Shackelford & Harold H. Zhang, 2006. "Capital Gains Taxes and Asset Prices: Capitalization or Lock-In?," NBER Working Papers 12342, National Bureau of Economic Research, Inc.
    5. Chongyang Chen & Zhonglan Dai & Douglas A. Shackelford & Harold H. Zhang, 2012. "Does Financial Constraint Affect Shareholder Taxes and the Cost of Equity Capital?," Working Papers 1202, Oxford University Centre for Business Taxation.
    6. Kryzanowski, Lawrence & Rahman, Abdul H., 2009. "Degrees-of-freedom problem and implied cost of equity capital," Finance Research Letters, Elsevier, vol. 6(3), pages 171-178, September.
    7. Dhaliwal, Dan & Krull, Linda & Li, Oliver Zhen, 2007. "Did the 2003 Tax Act reduce the cost of equity capital?," Journal of Accounting and Economics, Elsevier, vol. 43(1), pages 121-150, March.
    8. Sadok El Ghoul & Omrane Guedhami & Yang Ni & Jeffrey Pittman & Samir Saadi, 2012. "Does Religion Matter to Equity Pricing?," Journal of Business Ethics, Springer, vol. 111(4), pages 491-518, December.
    9. Rajan, Madhav & Reichelstein, Stefan J. & Soliman, Mark T., 2006. "Conservatism, Growth, and Return on Investment," Research Papers 1956, Stanford University, Graduate School of Business.


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