The Significance of Corporation Tax as a determinant of Systematic Risk: Evidence using United Kingdom (UK) data.

Abstract

This study uses the UK data and corporation tax changes of 1984 in the UK to test the significance of corporation tax as one of the factors influencing systematic risk. The extension to the theoretical relationship model between beta of levered equity and leverage is made to incorporate corporation tax and establish the testable relationship. Using both time series and cross sectional models involving fundamental determinants of systematic risk, the study provides an empirical evidence that corporation tax is one of the significant determinants of systematic risk and that systematic risk is positively related to leverage, effective corporate tax rate, return on assets, financial risk, growth in earnings and the risk of real asset., This study concludes that corporation tax changes of 1984 in the UK led to a significant decrease in firms’ equity betas.