Valuation in the Public and Private Sectors: Tax, Risk, Debt Capacity, and the Cost of Capital

45 Pages Posted: 24 Oct 2018 Last revised: 26 Oct 2018

See all articles by Richard A. Brealey

Richard A. Brealey

London Business School

Ian A. Cooper

London Business School

Michel A. Habib

University of Zurich; Swiss Finance Institute

Date Written: October 22, 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.

Suggested Citation

Brealey, Richard A. and Cooper, Ian Anthony and Habib, Michel A., Valuation in the Public and Private Sectors: Tax, Risk, Debt Capacity, and the Cost of Capital (October 22, 2018). Swiss Finance Institute Research Paper No. 18-68, Available at SSRN: https://ssrn.com/abstract=3271042 or http://dx.doi.org/10.2139/ssrn.3271042

Richard A. Brealey

London Business School ( email )

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Ian Anthony Cooper (Contact Author)

London Business School ( email )

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Michel A. Habib

University of Zurich ( email )

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HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

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