Share valuation and corporate equity policy
In recent years many contributions have appeared which examine the effects of corporate and personal taxation on firm financial policy. However, there has yet to appear an adequate explanation of why corporations continue to distribute dividends despite their disadvantageous tax treatment. We study this problem anew, in the context of an overlapping generations growth model with corporations financed by equity. Among our findings are: (1) capital owned by corporations may well be undervalued, even in the long run; (2) as a result of such undervaluation, firms may find it in the best interest of their stockholders to distribute dividends; and (3) an increase in the tax on distributions, while depressing the return to personal saving, may lead to an increase in the capital intensity of the economy. We also consider the criterion firms will use in evaluating new investment projects.
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- Martin Feldstein & Jerry Green & Eytan Sheshinski, 1979.
"Corporate Financial Policy and Taxation in a Growing Economy,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 93(3), pages 411-432.
- Feldstein, Martin & Sheshinski, Eytan & Green, Jerry, 1979. "Corporate Financial Policy and Taxation in a Growing Economy," Scholarly Articles 3203643, Harvard University Department of Economics.
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NBER Working Papers
0254, National Bureau of Economic Research, Inc.
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Elsevier, vol. 2(3), pages 211-224, September.
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- Mervyn A. King, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 21-35.
- 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.
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