The role of shifts in the effective tax rate on the cost of equity

Javier Rojo-Suárez and Ana B. Alonso-Conde

Research in Economics, 2024, vol. 78, issue 1, 61-72

Abstract: We propose an asset pricing model conditional on the effective tax rate, which allows us to explicitly estimate the impact of shifts in corporate taxes on the expected returns of equities. We evaluate the model using Spanish macro and market data to estimate the time-varying average corporate tax rate and average returns of different anomaly portfolios. Our results show that changes in corporate taxation are strongly explanatory of future stock returns and, consequently, the cost of capital of firms. Furthermore, uncertainty about the future tax burden generally translates into higher expected returns, which results in a lower value of firms.

Keywords: Effective tax rate; Conditioning information; CAPM; Tax regulation; Regulatory risk (search for similar items in EconPapers)
JEL-codes: G12 G15 G32 H25 H32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:78:y:2024:i:1:p:61-72

DOI: 10.1016/j.rie.2024.01.005

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