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Government Debt and Private Leverage: An Extension of the Miller Theorem

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  • Robert L. McDonald
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    Abstract

    This paper shows how government financing decisions can influence the corporate decision to use debt or equity finance. In particular, it is shown that an increase in the stock of taxable government debt reduces the equilibrium quantity of corporate debt, and that an increase in the stock of tax-free government debt reduces the equilibrium quantity of corporate equity. The effects of inflation rate and tax rate changes are also considered.

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    File URL: http://www.nber.org/papers/w0965.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0965.

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    Date of creation: Aug 1982
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    Publication status: published as McDonald, Robert L. "Government Debt and Private Leverage: An Extension ofthe Miller Theorem." Journal of Public Economics, Vol. 22, No. 3, (December 1983), pp. 303-325.
    Handle: RePEc:nbr:nberwo:0965

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    1. Robert A. Taggart, Jr., 1980. "Taxes and Corporate Capital Structure in an Incomplete Market," NBER Working Papers 0594, National Bureau of Economic Research, Inc.
    2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    3. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(4), pages 373-413, December.
    4. Taggart, Robert A, Jr, 1980. " Taxes and Corporate Capital Structure in an Incomplete Market," Journal of Finance, American Finance Association, American Finance Association, vol. 35(3), pages 645-59, June.
    5. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 261-75, May.
    6. Benjamin M. Friedman, 1981. "The Relative Stability of Money and Credit "Velocities" in the United States: Evidence and Some Speculations," NBER Working Papers 0645, National Bureau of Economic Research, Inc.
    7. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(1), pages 3-29, March.
    8. Cordes, Joseph J & Sheffrin, Steven M, 1983. " Estimating the Tax Advantage of Corporate Debt," Journal of Finance, American Finance Association, American Finance Association, vol. 38(1), pages 95-105, March.
    9. Michael C. Jensen, 1972. "Capital Markets: Theory and Evidence," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 3(2), pages 357-398, Autumn.
    10. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(3), pages 509-34, June.
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