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

Grant Richardson, Grantley Taylor, Ivan Obaydin and Mostafa Monzur Hasan

Accounting and Business Research, 2021, vol. 51, issue 4, 347-389

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.

Date: 2021
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DOI: 10.1080/00014788.2020.1808440

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