Corporate tax,financial leverage,and portfolio risk |
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| Institution: | 1. College of Business Administration, Ewha Womans University, 52 Ewhayeodae-gil, Seodaemun-gu, Seoul 03760, Republic of Korea;2. School of Business Administration, College of Business and Economics, Chung-Ang University, 84 Heukseok-ro, Dongjak-gu, Seoul 06974, Republic of Korea;3. College of Business Administration, California State University San Marcos, 333 S. Twin Oaks Valley Rd., San Marcos, CA 92096, USA;1. School of Economics and Management, Key Laboratory of Financial Science and Technology Innovation, Fuzhou University, 2 Xue Yuan Road, University Town, Fuzhou, Fujian, PR China;2. School of Economics and Management, Fuzhou University, 2 Xue Yuan Road, University Town, Fuzhou, Fujian, PR China;1. Department of Finance, School of Economics and Finance, Universidad EAFIT, Carrera 49 No. 7 Sur-50, Medellin, Colombia;2. School of Management, Universidad de los Andes, Calle 21, No. 1-20, Bogota, Colombia;3. Department of Economics and IME, University of Salamanca, Campus Miguel de Unamuno, 37007 Salamanca, Spain;1. Research Department, Hong Kong Monetary Authority, 55/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong, China;2. Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong, China;1. Department of Public Finance, National Chengchi University, No. 64, Sec. 2, Zhi-nan Rd, Wenshan, 11605 Taipei, Taiwan;2. Department of Business Administration, Chung Yuan Christian University, No. 200, Chung-pei Rd, Chung-li, 32023 Taoyuan, Taiwan;3. Department of Accountancy, City University of Hong Kong, 88 Tat Chee Avenue, Kowloon Tong, Hong Kong;1. Florida Atlantic University, College of Business, Finance, 777 Glades Road, Boca Raton, FL 33431, United States;2. Elon University, 100 Campus Drive, Elon, NC 27244, United States |
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| Abstract: | We examine the theoretical implications of corporate income tax for a risky portfolio in a aggregate-endowment economy. In this model, corporate income tax affects the portfolio risk associated with the rebalancing motive during market clearance. An asset is defined as a portfolio of stocks and bonds whose portfolio weights are similar to financial leverage. Corporate tax can decrease after-tax consumption from dividends (increase leverage) and increase the tax shield that increases dividends (decrease leverage). Changes in dividends are responsible for the correlation between expected dividend growth and consumption growth and, thus, affect stock pricing and returns. Overall, the model is characterized by tax-induced portfolio risk associated with financial leverage. |
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| Keywords: | Corporate tax Financial leverage Stock return Portfolio risk |
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