Does financial constraint affect the relation between shareholder taxes and the cost of equity capital?
Z Dai, DA Shackelford, HH Zhang… - The Accounting …, 2013 - publications.aaahq.org
We argue that reductions in shareholder taxes should lower the cost of equity capital more
for financially constrained firms than for other companies. Consistent with this prediction, we
find that, following the 1997 (TRA) and the 2003 (JGTRRA) cuts in US individual
shareholder taxes, financially constrained firms 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 both pressing needs for capital and disproportionate …
for financially constrained firms than for other companies. Consistent with this prediction, we
find that, following the 1997 (TRA) and the 2003 (JGTRRA) cuts in US individual
shareholder taxes, financially constrained firms 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 both pressing needs for capital and disproportionate …
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