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Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model

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  • Auerbach, Alan J
  • King, Mervyn A

Abstract

This paper explores the portfolio behavior of investors differing with respect to both tax rates and risk-aversion, emphasizing the role of constraints on individual and firm behavior in ensuring the existence of and characterizing portfolio equilibrium. Under certain conditions on the securities available in the market, which also are required for shareholders to be unanimous in supporting firm value maximization, investors will be segmented by tax rate into two groups, one specialized in equity and the other in debt. Though the relative wealths of the two groups determines the aggregate debt-equity ratio, each firm will be indifferent to its financial policy.

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 98 (1983)
Issue (Month): 4 (November)
Pages: 587-609

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Handle: RePEc:tpr:qjecon:v:98:y:1983:i:4:p:587-609

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Web page: http://mitpress.mit.edu/journals/

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References

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  1. Gordon, Roger H. & Bradford, David F., 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," Journal of Public Economics, Elsevier, vol. 14(2), pages 109-136, October.
  2. Alan J. Auerbach & Mervyn A. King, 1982. "Corporate Financial Policy, Taxes, and Uncertainty: An Integration," NBER Working Papers 0324, National Bureau of Economic Research, Inc.
  3. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 21-35, January.
  4. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August.
  5. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
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Cited by:
  1. Mervyn A. King & Jonathan I. Leape, 1984. "Wealth and Portfolio Composition: Theory and Evidence," NBER Working Papers 1468, National Bureau of Economic Research, Inc.
  2. Alan Auerbach & Michael P. Devereux & Helen Simpson, 2007. "Taxing Corporate Income," CESifo Working Paper Series 2139, CESifo Group Munich.
  3. Mihir A. Desai & Dhammika Dharmapala, 2007. "Taxes and Portfolio Choice: Evidence from JGTRRA's Treatment of International Dividends," NBER Working Papers 13281, National Bureau of Economic Research, Inc.
  4. Mervyn A. King, 1986. "The Empirical Analysis of Tax Reforms," NBER Working Papers 1996, National Bureau of Economic Research, Inc.
  5. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2007. "Nordic dual income taxation of entrepreneurs," International Tax and Public Finance, Springer, vol. 14(4), pages 407-426, August.
  6. Philip Bunn & Garry Young, 2004. "Corporate capital structure in the United Kingdom: determinants and adjustment," Bank of England working papers 226, Bank of England.
  7. James M. Poterba & Andrew Samwick, 1999. "Taxation and Household Portfolio Composition: U.S. Evidence from the 1980s and 1990s," NBER Working Papers 7392, National Bureau of Economic Research, Inc.
  8. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-93, December.
  9. James M. Poterba, 2001. "Taxation and Portfolio Structure: Issues and Implications," NBER Working Papers 8223, National Bureau of Economic Research, Inc.
  10. Shoven, John B. & Sialm, Clemens, 2004. "Asset location in tax-deferred and conventional savings accounts," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 23-38, January.
  11. Rydqvist, Kristian & Spizman, Joshua & Strebulaev, Ilya, 2011. "The evolution of aggregate stock ownership," CFS Working Paper Series 2011/18, Center for Financial Studies (CFS).
  12. Singh, Ajit, 1991. "The stock market and economic development: Should developing countries encourage stock markets?," MPRA Paper 53881, University Library of Munich, Germany, revised 16 Dec 1991.
  13. James M. Poterba & Arturo Ramirez Verdugo, 2008. "Portfolio Substitution and the Revenue Cost of Exempting State and Local Government Interest Payments from Federal Income Tax," NBER Working Papers 14439, National Bureau of Economic Research, Inc.
  14. Daniel R. Feenberg & James M. Poterba, 1992. "Which Households Own Municipal Bonds? Evidence From Tax Returns," NBER Working Papers 3900, National Bureau of Economic Research, Inc.
  15. Don Fullerton & Marios Karayannis, 1994. "The Taxation of Income from Capital in the United States, 1980-86," NBER Working Papers 2478, National Bureau of Economic Research, Inc.
  16. Jones, C., 1999. "Miller's Equilibrium and Uncertainty," ANU Working Papers in Economics and Econometrics 1999-373, Australian National University, College of Business and Economics, School of Economics.
  17. Mihir A. Desai & Dhammika Dharmapala & Winnie Fung, 2005. "Taxation and the Evolution of Aggregate Corporate Ownership Concentration," NBER Working Papers 11469, National Bureau of Economic Research, Inc.

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