Wealth Maximization and the Cost of Capital
AbstractIn this paper we explore the issue of wealth maximization and the implied behavior of the firm, paying particular attention to the results discussed above and how they are affected by the existence of capital income taxes. Our results indicate that a tax structure similar to that in existence in the United States influences the cost of capital in a very different way than has been assumed previously and that the relative advantages of debt over equity as a method of finance, and capital gains over dividends as a vehicle for personal realization of corporate profits, may have been greatly overstated. These findings may help to explain certain aspects of corporate financial behavior that have seemed puzzling.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0254.
Date of creation: Apr 1980
Date of revision:
Publication status: published as Auerbach, Alan J. "Wealth Maximization and the Cost of Capital." The Quarterly Journal of Economics, Vol. XCIII, No. 3, (August 1979), pp. 433-446.
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
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- Feldstein, Martin S & Green, Jerry & Sheshinski, Eytan, 1979.
"Corporate Financial Policy and Taxation in a Growing Economy,"
The Quarterly Journal of Economics,
MIT Press, vol. 93(3), pages 411-32, August.
- Feldstein, Martin & Sheshinski, Eytan & Green, Jerry, 1979. "Corporate Financial Policy and Taxation in a Growing Economy," Scholarly Articles 3203643, Harvard University Department of Economics.
- Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
- Stapleton, R C, 1972. "Taxes, the Cost of Capital and the Theory of Investment," Economic Journal, Royal Economic Society, vol. 82(328), pages 1273-92, December.
- King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 21-35, January.
- Alan J. Auerbach, 1980.
"Share Valuation and Corporate Equity Policy,"
NBER Working Papers
0255, National Bureau of Economic Research, Inc.
- David F. Bradford, 1979.
"The Incidence and Allocation Effects of a Tax on Corporate Distributions,"
NBER Working Papers
0349, National Bureau of Economic Research, Inc.
- Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
- Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
- Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February.
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