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Title:An analytical model of required returns to equity under taxation with imperfect loss offset PDF Logo
Authors:Lund, Diderik
Issue Date:2005
Series/Report no.:Memorandum, Department of Economics, University of Oslo 2005,13
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.
Subjects:Corporate tax
depreciation
imperfect loss offset
cost of capital
uncertainty
JEL:F23
G31
H25
Document Type:Working Paper
Appears in Collections:Memorandum, Department of Economics, University of Oslo

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