Working Paper: NBER ID: w1762
Authors: Albert Ando; Alan Auerbach
Abstract: This paper presents evidence about the coats of corporate capital in Japan and the US, for a sample of large companies, and evaluates a variety of hypotheses about why the cost might be lower in Japan.We find that the before-tax return to capital in Japan appears slightly lower than in the U.S. when corrected book measures of earnings are used, but that this result would be reversed if market returns to Japanese equity were used in place of corrected earningsto measure the cost of equity.To what ever extent the cost of capital may actually be lower in Japan, we show that this is unlikely to be due either to a lower overall corporate tax burden or the particular tax advantages of corporate borrowing.
Keywords: cost of capital; Japan; United States; corporate finance
JEL Codes: G31; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| before-tax return to capital in Japan (F21) | lower than in the U.S. (J89) |
| cost of capital in Japan (G31) | not stem from lower overall corporate tax burden (H29) |
| cost of capital in Japan (G31) | not stem from specific tax benefits associated with corporate borrowing (G39) |
| market returns to Japanese equity (G12) | reverses the result of before-tax returns (H23) |
| cost of capital in Japan (G31) | systematically lower (P22) |
| some industries in Japan (L62) | lower returns to capital (D33) |
| overall median average return to capital (D33) | similar across both countries (P52) |