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

Arbeitspapier

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.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Memorandum ; No. 2005,13

Classification and Topics

• Classification: Wirtschaft ; Multinational Firms; International Business ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Business Taxes and Subsidies including sales and value-added (VAT)
• Subject: Corporate tax ; depreciation ; imperfect loss offset ; cost of capital ; uncertainty ; Unternehmensbesteuerung ; Steuerrechtliche Abschreibung ; Kapitalkosten ; Capital Asset Pricing Model

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lund, Diderik
• Event: Veröffentlichung
• (who): University of Oslo, Department of Economics
• (where): Oslo
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/63180