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