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An analytical model of required returns to equity under taxation with imperfect loss offset

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Author Info
Lund, Diderik () (Dept. of Economics, University of Oslo)

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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://www.oekonomi.uio.no/memo/memopdf/memo1305.pdf
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Publisher Info
Paper provided by Oslo University, Department of Economics in its series Memorandum with number 13/2005.

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Length: 42 pages
Date of creation: 15 May 2005
Date of revision:
Handle: RePEc:hhs:osloec:2005_013

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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
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Web page: http://www.oekonomi.uio.no/indexe.html
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Related research
Keywords: Corporate tax; depreciation; imperfect loss offset; cost of capital; uncertainty;

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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This page was last updated on 2009-11-26.

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