Marginal versus Average Beta of Equity under Corporate Taxation

Diderik Lund

Memo 12/2009

Last ned memo

Even for fully equity-financed firms there may be substantial effects of taxationon the after-tax cost of capital. Among the few studies of these effects, even fewer identify all effects correctly. When marginal investment is taxed together with inframarginal, marginal beta differs from average if there are investment-related deductions like depreciation. To calculate asset betas, one should not only "unlever" observed equity betas, but "untax" and "unaverage" them. Risky tax claims are valued as call options, with closed-form solutions for the exercise probability. Results have practical relevance for multinationals operating under different tax systems.

Published June 20, 2014 11:24 AM - Last modified Jan. 24, 2019 11:43 AM