Three major measures of implied cost of equity are sensitive to a summary measure on macroeconomic conditions (the Chicago Fed National Activity Index, or CF3) while changes in the tax rates on investors’ dividend income and capital gains do not appear to be insulated from changes in general business conditions. In the presence of CF3, the measure of dividend tax penalty used in the current empirical research does not seem to be specific to detect the effect of dividend tax capitalization on cost of equity. Future research may need to hold a more nuanced view on the empirical proxy of dividend tax penalty amid major shifts in business cycles.
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