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Taxation and systematic risk under decreasing returns to scale

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Author Info
Lund, Diderik (Department of Economics, Copenhagen Business School)

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Abstract

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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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7643
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Publisher Info
Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number 02-2003.

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Length: 50 pages
Date of creation: 02 Jun 2006
Date of revision:
Handle: RePEc:hhs:cbsnow:2003_002

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Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Phone: 38 15 25 75
Fax: 38 15 26 65
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Web page: http://www.cbs.dk/departments/econ/
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Related research
Keywords: Corporate tax; depreciation; imperfect loss offset; decreasing returns; cost of capital; uncertainty;

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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.:
  1. Shanker, Latha, 2000. "An innovative analysis of taxes and corporate hedging," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 237-255, December. [Downloadable!] (restricted)
  2. McDonald, Robert & Siegel, Daniel, 1984. " Option Pricing When the Underlying Asset Earns a Below-Equilibrium Rate of Return: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 261-65, March. [Downloadable!] (restricted)
  3. Lund, Diderik, 2006. "Valuation, leverage and the cost of capital in the case of depreciable assets," Working Papers 03-2003, Copenhagen Business School, Department of Economics. [Downloadable!]
  4. Lawrence H. Summers, 1987. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 295-304 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  5. Lund,D., 2001. "Taxation, uncertainty, and the cost of equity for a multinational firm," Memorandum 13/2001, Oslo University, Department of Economics. [Downloadable!]
  6. Benninga, Simon & Sarig, Oded, 2003. "Risk, returns, and values in the presence of differential taxation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1123-1138, June. [Downloadable!] (restricted)
  7. Diderik Lund, 2002. "Petroleum Tax Reform Proposals in Norway and Denmark," The Energy Journal, International Association for Energy Economics, vol. 23(4), pages 37-56.
  8. Diderik Lund, 2002. "Taxation, Uncertainty, and the Cost of Equity," International Tax and Public Finance, Springer, vol. 9(4), pages 483-503, August. [Downloadable!] (restricted)
  9. Jeremy I. Bulow & Lawrence H. Summers, 1984. "The Taxation of Risky Assets," NBER Working Papers 0897, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Fane, G., 1987. "Neutral taxation under uncertainty," Journal of Public Economics, Elsevier, vol. 33(1), pages 95-105, June. [Downloadable!] (restricted)
  11. Hall, Robert E & Jorgenson, Dale W, 1969. "Tax Policy and Investment Behavior: Reply and Further Results," American Economic Review, American Economic Association, vol. 59(3), pages 388-401, June. [Downloadable!] (restricted)
  12. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May. [Downloadable!] (restricted)
  13. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May. [Downloadable!] (restricted)
  14. Gordon, Roger H & Wilson, John Douglas, 1989. "Measuring the Efficiency Cost of Taxing Risky Capital Income," American Economic Review, American Economic Association, vol. 79(3), pages 427-39, June. [Downloadable!] (restricted)
    Other versions:
  15. Levy, Haim & Arditti, Fred D, 1973. "Valuation, Leverage, and the Cost of Capital in the Case of Depreciable Assets," Journal of Finance, American Finance Association, vol. 28(3), pages 687-93, June. [Downloadable!] (restricted)
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  1. Lund, Diderik, 2006. "Valuation, leverage and the cost of capital in the case of depreciable assets," Working Papers 03-2003, Copenhagen Business School, Department of Economics. [Downloadable!]
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