Causality of risks, cost of equity and shading of the enterprise income
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Date
2020
Journal Title
Journal ISSN
Volume Title
Publisher
Izdevnieciba «Baltija Punlishing»
Abstract
The scandals with concealment of income by large companies in tax havens, the unresolved problem
of estimating the size of the shadow economy, and its high share in emerging markets (EM) make issues of the
methodology for calculating the shadow income of enterprises relevant for today. The aim of the study is to
substantiate the method for calculating the scope of shadowing of legal business income based on the method
of shadow rates of costs on invested (equity) capital. The authors construct a two-factor linear regression, which
enables to test the hypothesis of the effect of the expected rate of return and return on equity at the shadow
economy level. The regression analysis confirms a negative correlation between ROE and the shadow economy
level. There is a positive correlation between the risks of investing in equity, which are reflected in the expected
rate of return on capital, and the total income shadowing. The regression-correlation analysis of the dependence of
the shadow income of enterprises on these factors confirms a similar pattern. Comparison of the obtained values
of the shadow income of enterprises in Ukraine with alternative estimates of the shadow economy reveals a higher
sensitivity of the proposed method to changes in country risks, as well as to decisions aimed at improving business
conditions. It is confirmed that the exacerbation of risks automatically reflects on the expectations regarding the
return on investment and on the official declaration of income. Therefore, the shadow economy reduction is related
directly to a set of measures aimed at minimizing the risks of business activities.
Description
Keywords
shadow income, cost of equity, shadow rate of cost of equity, risk premium, interest rates, return on equity
Citation
Tereshchenko O. Causality of risks, cost of equity and shading of the enterprise income / Oleh Tereshchenko, Nataliia Babiak // Baltic Journal of Economic Studies. – 2020. – Vol. 6, № 2. – P. 61–68.