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Marginal versus Average Beta of Equity under Corporate Taxation

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Listed author(s):
  • Lund, Diderik

    ()

    (Dept. of Economics, University of Oslo)

Abstract

Even for fully equity-financed firms there may be substantial effects of taxation on the after-tax cost of capital. Among the few studies of these effects, even fewer identify all effects correctly. When marginal investment is taxed together with inframarginal, marginal beta differs from average if there are investmentrelated deductions like depreciation. To calculate asset betas, one should not only "unlever" observed equity betas, but "untax" and "unaverage" them. Risky tax claims are valued as call options, with closed-form solutions for the exercise probability. Results have practical relevance for multinationals operating under different tax systems.

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File URL: https://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2009/Memo-12-2009.pdf
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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 12/2009.

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Length: 56 pages
Date of creation: 09 Jun 2009
Publication status: Published as Lund, Diderik, 'How taxes on firms reduce the risk of after-tax cash flows' in FinanzArchiv/Public Finance Analysis, 2014, pages 567-598.
Handle: RePEc:hhs:osloec:2009_012
Contact details of provider: 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
Web page: http://www.oekonomi.uio.no/indexe.html
Email:


More information through EDIRC

Keywords: Cost of capital; WACC; loss offset; tax shields; options;

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; Fixed Investment and Inventory Studies
  • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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