Working Paper: NBER ID: w2286
Authors: Albert Ando; Alan J. Auerbach
Abstract: This paper uses financial statement data for large samples of U.S. and Japanese nonfinancial corporations to estimate the return to capital in each country for the period 1967-83. Interpreting these as measures of the cost of capital, we find that the before-tax cost of corporate capital was higher for U.S. firms than for their Japanese counterparts, with the average gap potentially as high as 5.8 percentage points. The use of alternative measurement techniques alters the gap slightly but does not alter the basic finding. However, market returns in the two countries were much closer during the same period. Certain potential explanations for the gap in returns are rejected by empirical evidence, including differences in corporate taxation, differences in borrowing and differences in asset mix. This leaves three potential explanations: differences in risk, differences in the tax treatment of individual capital income and imperfections in the international flow of capital
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Differences in risk, tax treatment of individual capital income, and imperfections in the international flow of capital (F21) | before-tax cost of corporate capital (G31) |
| before-tax cost of corporate capital for US firms (G32) | before-tax cost of corporate capital for Japanese firms (G32) |
| Average before-tax returns to capital differ significantly (D33) | before-tax cost of corporate capital (G31) |
| Adjusted earnings price ratio and returns to capital (G12) | cost of capital (G31) |
| Corporate taxation, borrowing practices, and asset mix do not explain the gap (G39) | before-tax cost of corporate capital (G31) |