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Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases

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  • Huizinga, Harry
  • Voget, Johannes
  • Wagner, Wolf

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. A one percentage point increase in the capital gains tax rate reduces the value of equity by 0.225%. The implied average effective tax rate on capital gains is 7% and it raises the cost of capital by 5.3% of its no-tax level. This indicates that capital gains taxation is a significant cost to firms when issuing new equity.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9151.

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Date of creation: Sep 2012
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Handle: RePEc:cpr:ceprdp:9151

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Keywords: Capital gains taxation; Cost of capital; International takeovers; Takeover premium;

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