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. We estimate that a 1 percentage point increase in the capital gains tax rate reduces the value of equity by around 0.3%, which suggests that the capital gains tax significantly raises firms’ cost of capital. Furthermore, we find that the implied capital gains tax burden is higher at times of high economic growth and low stock market valuation.

Additional Metadata
Keywords Capital gains taxation, Cost of capital, International takeovers, Takeover premium
JEL Financing Policy; Capital and Ownership Structure (jel G32), Mergers; Acquisitions; Restructuring; Corporate Governance (jel G34), Business Taxes and Subsidies (jel H25)
Persistent URL,
Journal Journal of Financial Economics
Huizinga, H. (Harry), Voget, J. (Johannes), & Wagner, W.B. (2018). Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of tax base. Journal of Financial Economics. doi:10.1016/j.jfineco.2018.04.014