Resource title

Taxation and systematic risk under decreasing returns to scale

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Resource description

AbstractLund (2002a) showed in a CAPM-type model how tax depreciation schedulesaffect required expected returns after taxes. Even without leverage higher tax ratesimplied lower betas when tax deductions were risk free. Here they are risky, andmarginal investment is taxed together with inframarginal in an analytical modelof decreasing returns. With imperfect loss offset tax claims are analogous to calloptions. The beta of equity is still decreasing in the tax rate, but increasing in theunderlying volatility. The results are important if market data are used to inferrequired expected returns, and in discussions of tax design.Keywords: Corporate tax, depreciation, imperfect loss offset, decreasing returns,cost of capital, uncertainty

Resource author

Diderik Lund

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Resource language

eng

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application/pdf

Resource resource URL

http://hdl.handle.net/10398/7643

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