Effect Of Income Tax On The Company's Cost Of Equity Capital

Learning from foreign research on the income tax effects of the company’s costof capital, and being based on the features of Chinese income tax regulations in21stcentury, this paper firstly analyses the status quo of China’s income tax burden andcost of equity capital since2000, builds the Chinese model of cost of equity capitalwith income tax, probes the positive (negative) relationship between Corporate(personal) income tax and the company’s cost of equity capital, and reveals incometax impact mechanism of the company’s cost of equity capital; Using regressionanalysis and structural equations, the paper, Secondly, studies the specific impact andthe impact mechanisms of income tax on the company’s cost of capital by empiricalmethods; Finally, the paper summarizes conclusions and makes recommendations.The paper calculates income tax burden, estimates the cost of equity capital forChina’s listed companies in all industries SFC according to OJ, PEG and Gordonmodels from2000to2012, and discusses the effect of income tax on the company’scost of equity capital, applying cost of equity capital (arithmetic mean of the threeestimates) and other data. Specific conclusions are as follows:(1) There is a quadraticfunctional relationship between the company’s cost of equity capital and income taxburden; The cost of equity capital of listing corporation has reduced since theimplementation of the new enterprise income tax law in2008; Corporate financingpolicy makes mediating effect of regulation in the process that enterprise income taxinfluences the company cost of equity capital.(2)The overall average cost of equitycapital of listed companies has increased after the personal income tax regulationswas amended in2006; As mediating variables in the effect of income tax oncompany’s cost of capital, corporate financing and dividend distribution policies serveas adjustabe bridge roles（.3）There are annual differences in the effects of income taxon the cost of equity capital; Corporate’s operating, financing and dividend policiesplay mediating roles in the influence of income tax upon company’s cost of capital;When Income tax laws and regulations are amended, corporate income tax burden,cash dividend distribution, wage payment, shareholder equity ratio and other variableschange, which not only has a direct impact on the company’s cost of equity capital,but also has a indirect effect through the intermediary effect of company’s financial policies.(4)Effects of individual income tax on the cost of equity capital are moresignificant than that of the enterprise income tax. The intermediary effects ofcorporate’s financial policies are asymmetric, that is, the company’s financial policieshave played strong roles as the buffer when enterprise income tax affects the cost ofequity capital, but played weak roles as the accelerator when individual income taxaffects the cost of equity capital.The paper makes suggestions from the perspectives of the company and thegovernment. Companies should take advantage of income tax laws and regulations,grasp the direct impact of income tax on the company’s cost of equity capital, manageefficiently the company’s operations, arrange reasonable financing Strategies andscientific dividend policies, playing mediating roles of the company’s financialpolicies, in order to control the company’s cost of capital, and achieve the company’sfinancial goals. The Government should consider the intermediary effect of thecompany’s financial policies, establish internal balance system of income taxregulations, improve relevant measures of tax and finance, adjust interest relationshipbetween the microeconomic and macroeconomic bodies, to keep the long-termhealthy development of the capital market, and promote sustainable economic growth.