Valuation in the public and private sectors: tax, risk, debt capacity, and the cost of capital
Subject
Finance
Publishing details
Swiss Finance Institute Research Paper
Authors / Editors
Brealey R A; Cooper I A; Habib M A
Biographies
Publication Year
2018
Abstract
The public and private sector costs of capital differ in the presence of taxes, because taxes are a cost to the private but not the public sector. We use a quasi-arbitrage approach to show how to include taxes in a comparison of capital costs. We find that taxes induce distortions that generate a systematic private sector preference for assets with rapid tax depreciation, high debt capacity, and low risk. We examine the implications of that preference for privatization, government outsourcing, and regulation. Our approach facilitates the analysis of transactions such as pure risk transfers, otherwise difficult using standard discounting methods.
Keywords
Public sector valuation; Public-Private-Partnership; Cost of capital; Tax
Series Number
18-68
Series
Swiss Finance Institute Research Paper