TY - JOUR
T1 - The effect of income shifting on the implied cost of equity capital
T2 - evidence from US multinational corporations
AU - Richardson, Grant
AU - Taylor, Grantley
AU - Obaydin, Ivan
AU - Hasan, Monzur
PY - 2021/6/7
Y1 - 2021/6/7
N2 - 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.
AB - 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.
KW - implied cost of equity capital
KW - income shifting
KW - US multinational corporations
UR - http://www.scopus.com/inward/record.url?scp=85091372777&partnerID=8YFLogxK
U2 - 10.1080/00014788.2020.1808440
DO - 10.1080/00014788.2020.1808440
M3 - Article
AN - SCOPUS:85091372777
SN - 0001-4788
VL - 51
SP - 347
EP - 389
JO - Accounting and Business Research
JF - Accounting and Business Research
IS - 4
ER -