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Technical Note: Tax Capitalization, Beta, and the Cost of Equity

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  • Jacques Schnabel

Abstract

In the context of a tax-adjusted reformulation of the capital asset pricing model, this article examines the extent to which capital gains taxes are impounded in the rates of return required by stockholders. Consistent with extant literature, the cost of equity capital is shown to be positively related to the capital gains tax rate. However, the induced increase in the cost of equity is lower (higher) for higher (lower) beta shares. An intuitive explanation is provided for this phenomenon in terms of greater risk-sharing, with the fiscal authority stimulating an increased stockholder propensity to bear the risk of share ownership.

Suggested Citation

  • Jacques Schnabel, 2013. "Technical Note: Tax Capitalization, Beta, and the Cost of Equity," The Engineering Economist, Taylor & Francis Journals, vol. 58(2), pages 149-155.
    • Handle: RePEc:taf:uteexx:v:58:y:2013:i:2:p:149-155
    DOI: 10.1080/0013791X.2013.764030
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