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November 26, 2014

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Jack (Jacques) A. Schnabel

Technical Note: Tax Capitalization, Beta, and the Cost of Equity


Dr. J. A. Schnabel

published: 2013 | Research publication | Published paper

This paper argues that a rise in the capital gains tax induces an increase in the cost of equity, consistent with extant literature. However, a novel conclusion is derived, viz. the induced increase in the cost of equity is lower (higher) for higher (lower) beta shares. The intuition for the foregoing is explicated in terms of great risk sharing with the fiscal authority, occasioned by the increase in the capital gains tax rate,stimulating increased stockholder propensity to bear the risk of share ownership, thus resulting in a lower increase in the induced cost of equity.

This paper was published in The Engineering Economist Volume 58, Number 2 (2013) pp. 149-155.

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revised Jun 14/13

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