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

Diderik Lund

No 13/2005, Memorandum from Oslo University, Department of Economics

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.

Keywords: Corporate tax; depreciation; imperfect loss offset; cost of capital; uncertainty (search for similar items in EconPapers)
JEL-codes: F23 G31 H25 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2005-05-15
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (1)

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.

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