We thank I/B/E/S Inc. for providing earnings forecasts and long-term growth forecasts data. We also thank Richard Leftwich (the editor), Gerhard Barone, Jennifer Blouin, Joe Piotroski, two anonymous referees, and seminar participants at the University of Arizona, the College of William and Mary, the University of Florida, the 14th Annual Conference on Financial Economics and Accounting at Indiana University, and the 2004 University of North Carolina Tax Symposium for their helpful suggestions.
Dividend Taxes and Implied Cost of Equity Capital
Article first published online: 13 SEP 2005
Journal of Accounting Research
Volume 43, Issue 5, pages 675–708, December 2005
How to Cite
DHALIWAL, D., KRULL, L., LI, O. Z. and MOSER, W. (2005), Dividend Taxes and Implied Cost of Equity Capital. Journal of Accounting Research, 43: 675–708. doi: 10.1111/j.1475-679X.2005.00186.x
- Issue published online: 13 SEP 2005
- Article first published online: 13 SEP 2005
- Received 01 December 2003; accepted 23 May 2005
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.