This paper studies the theoretical and quantitative implications of corpo-rate income tax on asset pricing in a two-tree aggregate endowment economy. I find a mechanism through which corporate income tax increases and de-creases'portfolio risk' associated with rebalancing motive and introduce a new tax-related systematic risk. The tax affects portfolio conrfiguration, re-lated to financial leverage, and plays an important role in determining price of stock since it generates both stabilization and destabilization on the volatility of return. A higher volatility is associated with a greater co-movement be-tween consumption growth and stock return. Stabiliazation effect dominates destabilization e¤ect, and thus the tax relieve the risk.
Keywords: Asset Pricing, Corporate Tax, Financial Leverage
