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Does tax convexity matter for risk? A dynamic study of tax asymmetry and equity beta
Adrian C. H. Lei1; Martin H. Y. Yick2; Keith S. K. Lam1
2013
Source PublicationReview of Quantitative Finance and Accounting
ISSN0924-865X
Volume41Issue:1Pages:131–147
Abstract

The purpose of this study is to explore the effect of tax convexity on firms’ market risk, where tax convexity measures the progressivity of firms’ tax function. We examine the relation between equity beta and tax convexity based on a standard contingent-claims model, in which firms face nonlinear tax schedules. We verify that in the presence of default and growth options, the effect of tax convexity on beta is significant and depends on several countervailing forces. Tax convexity has a direct, positive effect on beta, as well as two indirect countereffects through default and growth options. The overall effect is ambiguous and quantitatively significant. As asymmetric tax schedules are used in most countries, assuming a linear tax schedule in the valuation framework may misestimate beta and thus fail to assess risk accurately. Our theoretical model shows that tax convexity should be taken into consideration when estimating equity beta.

KeywordGrowth Option Default Option Equity Beta Tax Convexity Contingent-claim Model
DOI10.1007/s11156-012-0303-2
Language英语
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Document TypeJournal article
专题Faculty of Business Administration
DEPARTMENT OF FINANCE AND BUSINESS ECONOMICS
Affiliation1.Department of Finance and Business Economics, Faculty of Business AdministrationUniversity of MacauMacauChina
2.Department of Finance and Insurance, Faculty of BusinessLingnan University of Hong KongHong KongChina
First Author AffilicationFaculty of Business Administration
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Adrian C. H. Lei,Martin H. Y. Yick,Keith S. K. Lam. Does tax convexity matter for risk? A dynamic study of tax asymmetry and equity beta[J]. Review of Quantitative Finance and Accounting,2013,41(1):131–147.
APA Adrian C. H. Lei,Martin H. Y. Yick,&Keith S. K. Lam.(2013).Does tax convexity matter for risk? A dynamic study of tax asymmetry and equity beta.Review of Quantitative Finance and Accounting,41(1),131–147.
MLA Adrian C. H. Lei,et al."Does tax convexity matter for risk? A dynamic study of tax asymmetry and equity beta".Review of Quantitative Finance and Accounting 41.1(2013):131–147.
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