| The major objectives of this research are: first to estimate the cost of capital and capital flight for Japan and the United States, and create the time series data for cost of capital and capital flight. Second, to estimate the real relationship between the cost of capital and capital flight, using the data generated, and to test the hypothesis that the cost of capital is an important factor affecting capital flight in the macro level. Finally, to model a micro level analysis to explain the relationship between the cost of capital flight and capital flight for firms and individuals. The methods of analysis adopted for this study consist of three parts. First, most of the literature on the cost of capital always assumes that the inflation rate is constant at 5 percent among countries. However, this study adopts the actual annual inflation rate in order to more appropriately reflect the cost of capital. As for the corporate tax rate, almost all other international tax research use only the federal (national) corporate tax rate, while this study combines the federal (national) and state (local) tax rates together and also includes all the exemptions and deductible tax rules in the estimation process. Therefore, results of this study more closely reflect the real cost of capital. Second, the traditional OLS method has a serious problem about assumptions over the error term. Thus, a modified model using the cointegration method, the Johansen tests, is adopted in our analysis. Third, in order to understand the overall relationship between the cost of capital and capital flight, this study combines the asymmetric information theory and the comparative static cost of capital model to demonstrate firm's behaviors. Especially, the inclusion of banking industry in our model demonstrates that the asymmetric information may affect the capital flight. This conclusion negates the results obtained in Gordon (1996). For empirical analysis, from the two country studies, the results show that the cost of capital can affect different kinds of capital flight significantly on macro level. Those results imply that tax factors may be a good variable to attract capital inflows internationally. From the theoretical analysis, based on the assumptions of firms' profit-maximization, with standard debt contract existing between firms and banks, and risk neutrality of firms, banks and the suppliers of capital, asymmetric information theory in combination with the comparative static cost of capital model can explain the international investment behaviors of the firms and individuals. That is, the existence of asymmetric information is sometimes good for firms in some situations. Firms will be encouraged to invest abroad because the firms can get the subsidies from the banking industry in the host country to decrease the cost of capital although the risk is higher in foreign (host) countries. The asymmetric information theory can explain why some firms do investment abroad while some others do not. |