We identify the conditions of favorable improvement in corporate values when the corporate income tax rate is decreased, based on the traditional firm valuation model of Miller-Modigliani (1961). The condition shows that we need to estimate both the required rate of return on investment, generally known as the unlevered firm's cost of capital, and the levered cost of capital as well.

 

We analyze the listed companies on Korea Exchange (KRX) during the period of 11 years from 2000 to 2010.

The empirical results are summarized as follows; first of all, the corporate tax cut policy can have positive effects on firm values only to about 60% of the listed companies, on average, during the whole periods. And there are no significant differences in the positive tax cut effects regardless of the sub-periods, industry classifications and firm sizes. Second, it is also shown that the companies who satisfy the conditions to enjoy benefits from the tax cut did not significantly increase the investments in physical assets.