TY  - JOUR
AU  - Goolsbee,Austan
TI  - The Importance of Measurement Error in the Cost of Capital
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7558
PY  - 2000
Y2  - February 2000
UR  - http://www.nber.org/papers/w7558
L1  - http://www.nber.org/papers/w7558.pdf
N1  - Author contact info:
Austan Goolsbee
Booth School of Business
University of Chicago
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-5869
Fax: 773/702-0458
E-Mail: goolsbee@chicagobooth.edu
AB  - Conventional estimates of the impact of taxes on investment may be seriously biased by measurement error in the cost of capital. The existence and size of such error, however, has not been documented.  Using panel data on different types of capital equipment, this paper provides direct evidence of measurement error in the tax component of the cost of capital, accounting for about 20 percent of the tax term's variance.  Correcting for the error with IV estimation shows that taxes significantly affect both prices and investment and that conventional results may be off by as much as a factor of four.
ER  -