NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Does Financial Constraint Affect Shareholder Taxes and the Cost of Equity Capital?

Chongyang Chen, Zhonglan Dai, Douglas Shackelford, Harold Zhang

NBER Working Paper No. 17169
Issued in June 2011
NBER Program(s):   AP   CF   PE

We show that firms with the least elastic demand for equity capital should benefit the most from reductions in shareholder taxes. Consistent with this prediction, we find that, following 1997 and 2003 cuts in U.S. individual shareholder taxes, financially constrained firms, and particularly those with disproportionate ownership by U.S. individuals, enjoyed larger reductions in their cost of equity capital than did other firms. The results are consistent with the incidence of the tax reductions falling mostly on firms with the most pressing needs for capital. Furthermore, the findings provide an explanation for the heretofore puzzling finding that, following the unprecedented 2003 reduction in dividend tax rates, non-dividend-paying firms outperformed dividend-paying firms. Not surprisingly, we find that non-dividend-paying firms are more financial constrained than dividend-paying firms are. When a firm’s financial constraint and dividend choice are jointly considered, we find that the extent of financial constraint affects the change in the cost of equity capital, but whether a firm issues a dividend does not. In other words, it appears that the extant studies suffered from the omission of a correlated variation, the extent to which a firm is financially constrained.

download in pdf format
   (289 K)

email paper

This paper is available as PDF (289 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17169

Published: Dai, Zhonglan, Douglas A. Shackelford, Harold H. Zhang, and Chongyang Chen, “Does Financial Constraint Affect the Relation between Sharehol der Taxes and the Cost of Equity Capital?” The Accounting Review 88:5 , September 2013, 1603-1627.

Users who downloaded this paper also downloaded these:
Gorodnichenko and Schnitzer w15792 Financial constraints and innovation: Why poor countries don't catch up
Erel, Jang, and Weisbach w18840 Do Acquisitions Relieve Target Firms’ Financial Constraints?
Markle and Shackelford w16839 Cross-Country Comparisons of Corporate Income Taxes
Da, Guo, and Jagannathan w14889 CAPM for Estimating the Cost of Equity Capital: Interpreting the Empirical Evidence
Asker, Farre-Mensa, and Ljungqvist w17394 Comparing the Investment Behavior of Public and Private Firms
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us