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Miller's Equilibrium and Uncertainty

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  • Jones, C.
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    Abstract

    This paper highlights the arbitrage by firms in Miller's (1977) equilibrium when consumers face (short) selling constraints to restrict tax arbitrage. In this competitive equilibrium firms create risky tax-preferred securities that divide investors into strict tax clienteles; any changes in debt-equity ratios by individual firms have no real effects on consumers because other firms undo them.

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    File URL: http://www.ecocomm.anu.edu.au/research/papers/pdf/wp373.pdf
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    Bibliographic Info

    Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 1999-373.

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    Length: 17 pages
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:acb:cbeeco:1999-373

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    Related research

    Keywords: CAPITAL ; BUSINESS FINANCING ; ARBITRAGE;

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    References

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    1. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    2. Haugen, Robert A & Senbet, Lemma W, 1978. "The Insignificance of Bankruptcy Costs to the Theory of Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 33(2), pages 383-93, May.
    3. Taggart, Robert A, Jr, 1980. " Taxes and Corporate Capital Structure in an Incomplete Market," Journal of Finance, American Finance Association, vol. 35(3), pages 645-59, June.
    4. Aivazian, Varouj A & Callen, Jeffrey L, 1987. " Miller's Irrelevance Mechanism: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 169-80, March.
    5. Alan J. Auerbach & Mervyn A. King, 1984. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," NBER Working Papers 0546, National Bureau of Economic Research, Inc.
    6. Chris Jones & Frank Milne, 1992. "Tax Arbitrage, Existence of Equilibrium, and Bounded Tax Rebates," Mathematical Finance, Wiley Blackwell, vol. 2(3), pages 189-196.
    7. Senbet, Lemma W & Taggart, Robert A, Jr, 1984. " Capital Structure Equilibrium under Market Imperfections and Incompleteness," Journal of Finance, American Finance Association, vol. 39(1), pages 93-103, March.
    8. DeAngelo, Harry & Masulis, Ronald W, 1980. " Leverage and Dividend Irrelevancy under Corporate and Personal Taxation," Journal of Finance, American Finance Association, vol. 35(2), pages 453-64, May.
    9. Dammon, Robert M & Green, Richard C, 1987. " Tax Arbitrage and the Existence of Equilibrium Prices for Financial Assets," Journal of Finance, American Finance Association, vol. 42(5), pages 1143-66, December.
    10. Ross, Stephen A, 1985. " Debt and Taxes and Uncertainty," Journal of Finance, American Finance Association, vol. 40(3), pages 637-57, July.
    11. Han Kim, E. & Lewellen, Wilbur G. & McConnell, John J., 1979. "Financial leverage clienteles : Theory and evidence," Journal of Financial Economics, Elsevier, vol. 7(1), pages 83-109, March.
    12. Harris, John M, Jr & Roenfeldt, Rodney L & Cooley, Philip L, 1983. " Evidence of Financial Leverage Clienteles," Journal of Finance, American Finance Association, vol. 38(4), pages 1125-32, September.
    13. Robert A. Taggart, Jr., 1980. "Taxes and Corporate Capital Structure in an Incomplete Market," NBER Working Papers 0594, National Bureau of Economic Research, Inc.
    14. Sarig, Oded & Scott, James, 1985. " The Puzzle of Financial Leverage Clienteles," Journal of Finance, American Finance Association, vol. 40(5), pages 1459-67, December.
    15. Stiglitz, Joseph E, 1988. "Why Financial Structure Matters," Journal of Economic Perspectives, American Economic Association, vol. 2(4), pages 121-26, Fall.
    16. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
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