How costly is it to issue equity when capital gains are taxed?

What is the impact of capital gains tax on share prices? It should be rather high, as stock shares main point is to appreciate. But assessing this is difficult because people find all sorts of ways to avoid this tax, such as taking offsetting losses or exemptions. In addition, capital gains are only taxed when realized.

Harry Huizinga, Johannes Voget and Wolf Wagner find a trick to disentangle this. When there is a cross-border merger or acquisition, any assets subject to capital gains suddenly fall under a different tax jurisdiction as shareholders are located in different countries. As long as the M&A was operated with cash, a change in asset value should reflect the impact of the difference in capital gains taxes. From their database, the authors find that a one percentage point difference in taxes results in a 0.225% reduction in the share price at takeover, and calculating backwards this indicates that the effective tax rate is 31% of the statutory one. This means that the average capital gains tax in the OECD increases equity costs by 5.3%. It is then evident to find that where taxes are higher, takeovers are more likely to be financed by equity, as it does not imply a transfer of tax liability.