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Perspectives on David Guenther's and Richard Sansing's 'Fundamentals of Shareholder Tax Capitalization'

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  • Deen Kemsley

    (Columbia Business School)

Abstract

A great deal of recent debate has revolved around the role for the RE/BV x NI interaction term in the equations used by Harris and Kemsley (1999) and follow-up studies, challenging the decision to include the term (see, e.g., Hanlon, Myers, and Shevlin, 2001, and Dhaliwal, Erickson, Myers, and Banyi, 2001). Guenther and Sansing (2002) address the issue directly, providing a set of sufficient conditions under which the interaction term is required. Their analysis, along with the extant empirical evidence, suggests it is critical to include the interaction term in empirical equations, else mis-specification results. Nevertheless, the analysis also indicates that the tax interpretation for retained earnings coefficients is not as clear as implied by Harris and Kemsley (1999). In this brief comment, I provide perspectives on the analysis in Guenther and Sansing (2002), and I flesh it out by showing the effects of adding another key assumption to their model.

Suggested Citation

  • Deen Kemsley, 2002. "Perspectives on David Guenther's and Richard Sansing's 'Fundamentals of Shareholder Tax Capitalization'," Yale School of Management Working Papers ysm266, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm266
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    Keywords

    Dividend Tax Capitalization; Cost of Capital;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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