The Cost of Capital in the U.S. and Japan: A Comparison
NBER Working Paper No. 2286 (Also Reprint No. r1392)
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
Published: "The Cost of Capital in the United States and Japan: A Comparison." From Journal of the Japanese and International Economies, Vol. 2, pp. 134-158,(1988).
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