Valuation in the Public and Private Sectors: Tax, Risk, Debt Capacity, and the Cost of Capital

Richard A. Brealey, Ian A. Cooper and Michel A. Habib
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Richard A. Brealey: London Business School
Ian A. Cooper: London Business School
Michel A. Habib: University of Zurich; Swiss Finance Institute

No 18-68, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The public and private sector costs of capital differ in the presence of taxes, because taxes are a cost to the private but not the public sector. We use a quasi-arbitrage approach to show how to include taxes in a comparison of capital costs. We find that taxes induce distortions that generate a systematic private sector preference for assets with rapid tax depreciation, high debt capacity, and low risk. We examine the implications of that preference for privatization, government outsourcing, and regulation. Our approach facilitates the analysis of transactions such as pure risk transfers, otherwise difficult using standard discounting methods.

Pages: 45 pages
Date: 2018-10
New Economics Papers: this item is included in nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1868

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