The effect of income shifting on the implied cost of equity capital: evidence from US multinational corporations

Grant Richardson*, Grantley Taylor, Ivan Obaydin, Monzur Hasan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This study examines the effect of income shifting on the implied cost of equity capital (ICOE) for US multinational corporations (MNCs). We find that income shifting is significantly positively associated with the ICOE after controlling for corporate tax avoidance and other determinants of the ICOE. On average, a one-standard deviation increase in income shifting is associated with an increase in the ICOE of around 0.37%. Our main results are robust to additional tests of risk-pricing and endogeneity. Furthermore, the association between income shifting and the ICOE is more pronounced for MNCs operating in low-quality information environments and where corporate governance monitoring is inadequate. Overall, our results show that the capital market perceives the income shifting of MNCs as a significantly risky undertaking.

Original languageEnglish
Pages (from-to)347-389
Number of pages43
JournalAccounting and Business Research
Volume51
Issue number4
Early online date24 Sep 2020
DOIs
Publication statusPublished - 7 Jun 2021

Keywords

  • implied cost of equity capital
  • income shifting
  • US multinational corporations

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