Lund (2002a) showed in a CAPM-type model how tax depreciation schedules affect required expected returns after taxes. Even without leverage higher tax rates implied lower betas when tax deductions were risk free. Here they are risky, and marginal investment is taxed together with inframarginal in an analytical model of decreasing returns. With imperfect loss offset tax claims are analogous to call options. The beta of equity is still decreasing in the tax rate, but increasing in the underlying volatility. The results are important if market data are used to infer required expected returns, and in discussions of tax design.
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Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number
02-2003.
Length: 50 pages Date of creation: 02 Jun 2006 Date of revision: Handle: RePEc:hhs:cbsnow:2003_002
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Find related papers by JEL classification: F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Jeremy I. Bulow & Lawrence H. Summers, 1984.
"The Taxation of Risky Assets,"
NBER Working Papers
0897, National Bureau of Economic Research, Inc.
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