School of Business publications portal
This portal is no longer updated. Aalto University School of Business Master's Theses are now in the Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Finance | Finance | 2011
Thesis number: 12729
Hedging corporate income tax revenue volatility in Finnish municipalities
Author: Rekola, Iris
Title: Hedging corporate income tax revenue volatility in Finnish municipalities
Year: 2011  Language: eng
Department: Department of Finance
Academic subject: Finance
Index terms: rahoitus; financing; riskienhallinta; risk management; julkinen sektori; public sector; kunnat; municipalities; verotus; taxation
Pages: 83
Key terms: Risk management, hedging, public sector, municipalities, corporate income tax

This thesis looks at hedging corporate income tax revenue cash flows in the Finnish municipalities with stock market related instruments. Public sector has been largely neglected in the hedging literature and the topic has not been studied previously in Finland. I also look at the option to consolidate municipalities in order to reduce the volatility in the corporate income tax revenues. Thirdly I test how strong is the relationship between individual municipalities’ tax revenues and the general GDP development in the country. I also discuss the political and practical aspects of financial hedging in municipalities.


The municipal data used in the study is collected by Statistics Finland on a yearly basis. Four case municipalities are studied. Two of them, Hämeenlinna and Salo are middle sized cities that took part in a municipality consolidation process in 2009. They are compared to two smaller municipalities, Renko and Halikko, which were part of the consolidations in the respective regions. The hedging instruments are based on the S&P 500, Nasdaq 100 and OMX Helsinki indices. The market data is accessed through Bloomberg. I study whether hedging 10 per cent of the annual corporate income tax revenues would have reduced the volatility of the cash flows over the time period 1998-2008. I also employ optimal hedge ratios based on Ederington’s (1979) method. To calculate the effect of the consolidation, I divide the total amount of corporate income tax revenues to individual municipalities in the region based on the size of the population, to see if the volatility of the revenues is reduced. The effect of the GDP growth is studied via simple OLS regression.


The results show that over the time period 1998-2008, the effect of the different hedges on the volatility of the tax cash flows varies between -28.6% and 46.8% in the case municipalities. Calculating optimal hedge ratios does not give trustworthy results. It is questioned whether the results from the past period could be used for the future. Consolidation of the municipalities would have reduced the volatility of the tax revenues in five out of ten municipalities in Salo and in all six municipalities in Hämeenlinna region. GDP growth is found to explain on average 16% of the variation in the corporate income tax revenue growth.
Master's theses are stored at Learning Centre in Otaniemi.