Monthly Archives: September 2014

CAPITAL GAINS TAXES: Introduction

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This paper examines whether stock prices are discounted for potential capital gains taxes. The extent to which shareholder taxes affect stock prices is central to firm valuation and tax policy and has long intrigued scholars in economics, finance, and accounting. To date, the controversy has largely centered on whether dividend taxes are capitalized in equity […]

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COSTS OF EQUITY CAPITAL: Appendix 1

In the model uncertainty calculations presented in Tables VIII and IX we simply set the posterior model probabilities to be equal across models. Computing those probabilities using (A.28) is beyond the scope of this study. Moreover, if the set of prior model probabilities (7^’s) is the same for each stock, then the posterior probabilities would […]

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COSTS OF EQUITY CAPITAL: Appendix

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This section extends results in Stambaugh (1997) and derives the posterior mean and variance-covariance matrix of Л in (31) and (32) when the likelihood function is given by (8) and the prior is given by (17). Recall that A contains the first К elements of в. Let Ф denote the data set consisting of F^ […]

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COSTS OF EQUITY CAPITAL: Conclusions 3

As noted at the outset, the Bayesian approach provides a coherent framework for permitting a decision maker’s judgment, expressed as prior beliefs, to enter the cost-of-equity estimation. A key feature of those prior beliefs explored in this study is the degree of mispricing uncertainty (cra). We set the prior mean of the pricing error (<5) […]

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COSTS OF EQUITY CAPITAL: Conclusions 2

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The framework introduced here allows a decision maker to adjust a stock’s estimated expected excess return away from the value implied by a pricing model and toward the historical average excess return on the firm’s stock (since the posterior mean of a is adjusted away from zero and toward the OLS intercept a). That is, […]

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COSTS OF EQUITY CAPITAL: Conclusions

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Table IX is the equivalent of Table VIII, except that it is constructed for the utilities industry and based on the utility-specific prior. The results for Bay State Gas in Panel A are quite similar to those obtained with the all-stock prior. In Panel B, which reports averages across the 135 utility stocks, both model […]

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COSTS OF EQUITY CAPITAL: Model Uncertainty 4

The model uncertainty associated with the three-model set is 1.29%, which is less than the average within-model uncertainty of 1.51%. As оq grows large, within-model uncertainty increases, since it includes uncertainty about a, and model uncertainty typically declines (although the latter effect is somewhat non-monotonic for Bay State). Thus, in terms of contributions to the […]

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