Working Paper: CEPR ID: DP9151
Authors: Harry Huizinga; Johannes Voget; Wolf Wagner
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.
Keywords: capital gains taxation; cost of capital; international takeovers; takeover premium
JEL Codes: G32; G34; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital gains tax rate in the acquirer country (F21) | valuation of the target firm (G34) |
| capital gains tax rate in the acquirer country (F21) | takeover premiums (G34) |
| capital gains tax rate in the acquirer country (F21) | cost of equity capital (G12) |
| capital gains tax rate in the acquirer country (F21) | likelihood of cash transactions in takeovers (G34) |