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

Michel Habib, Richard Brealey and Ian Cooper

No 13277, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Public sector; Private sector; Cost of capital; Valuation; Tax; Risk; Debt capacity (search for similar items in EconPapers)
JEL-codes: G18 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-pub
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