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

Author

Listed:
  • Harry Huizinga

    () (Tilburg University, and CEPR)

  • Johannes Voget

    () (University of Mannheim, Oxford University Centre for Business Taxation,CentER Tilburg University)

  • Wolf Wagner

    () (Tilburg University, Duisenberg School of Finance)

Abstract

In a cross-border takeover, the tax base associated with future capital gains is transferred from target shareholders to acquirer shareholders. Crosscountry 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.

Suggested Citation

  • Harry Huizinga & Johannes Voget & Wolf Wagner, 2012. "Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases," Tinbergen Institute Discussion Papers 12-100/IV/DSF39, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20120100
    as

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    References listed on IDEAS

    as
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How costly is it to issue equity when capital gains are taxed?
      by Economic Logician in Economic Logic on 2013-01-11 21:06:00
    2. [経済]キャピタルゲイン課税が資本コストに与える影響
      by himaginary in himaginaryの日記 on 2013-01-12 14:00:00

    More about this item

    Keywords

    Capital gains taxation; Cost of capital; International takeovers;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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