Testing the S-Corp Value Premium for Realism and Reasonableness

Abstract

For almost fifty years, the field of finance and the valuation profession have deliberated over the potential impact of taxation on security prices and costs of capital as well as the value effects of the tax attributes of pass-through entities (PTEs). Hundreds of papers on these topics have been published. Analytic models that offer various approaches to problem resolution have been proposed. Some have been widely used. Debates have been held in court and out. However, all this activity has resulted in a thicket of theory and practice that is neither conclusive nor easy to maneuver with clarity and common sense. The presenting issue for the valuation community—the potential value impact of taxation on PTEs—is only one of a number of nested issues that continue to be explored. To address these, we present and analyze findings from the finance and valuation literatures, as well as publicly available market evidence. We examine the core valuation assumptions currently framing the issues. We then demonstrate...