Corporate Tax Rate Change Impacts on Beta
Perez, Alejandro D., 1994--
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The new corporate tax rate change will have an impact on company financing strategies. Higher levels of corporate borrowing or debt will lead to higher measured beta for firms. An examination of average company betas before and after the last significant corporate tax change in 1986 is performed to test for increased risk taking by firms. We look at rolling betas between 1975 and 1997 using observation periods of 6, 12, 18, and 24 months. We then apply the results of the analysis in predicting the effects of the more recent corporate tax change in 2017. We use data collected from the Center for Research in Security Prices as sourced from Wharton Research Data Services. Our findings are a reduction in betas after the tax change consistent with a reduction in debt levels and risk taking by firms. We may conclude companies will restrain borrowing in the coming years in reaction to the reduced corporate tax rate.