CAUSALITY OF RISKS, COST OF EQUITY AND SHADING OF THE ENTERPRISE INCOME

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.