Financial Transaction Taxes and the Effect on Firms’ Cost of Capital : An empirical Study on how Financial Transaction Taxes Affect the Cost of Capital

Sammanfattning: Financial Transaction Taxes (FTTs) have been subject to a lot of debate in the recentyears. The debate is in many cases characterized by an insecurity of the effects ofFTTs. The research on how FTTs affect the cost of capital is limited. In order toprovide a valuable aspect of the debate this paper examines how different forms ofFTTs in Europe have affected the cost of capital in different countries. The CAPM isused in order to control for changes in other factors affecting the realized return,which is used as a proxy for expected returns. We find that in two cases theimposition an FTT and the increase in tax rate of an existing FTT increases the cost ofcapital at a significant level. In one period the change compared to the reference indexis not significant but the change itself is significant making it hard to draw anyconclusions. In one period the removal of an existing FTT leads to a significantincrease compared to the index but the change of the companies inside of the period isnot significant. This paper provides insights in the FTTs’ effect on cost of capital andprovides valuable examples on how future research can be conducted to betterunderstand FTTs’ effect on cost of capital.