IDEAS home Printed from https://ideas.repec.org/a/sae/pubfin/v19y1991i3p251-292.html
   My bibliography  Save this article

Tax Policies and the Real and Financial Decisions of the Firm: the Effects of the Tax Reform Act of 1986

Author

Listed:
  • Serge Nadeau

    (University of Victoria)

  • Robert P. Strauss

    (Carnegie Mellon University)

Abstract

This article reviews various models proposed in the literature to estimate the impact of taxation on the real and financial decisions of the firm, and uses one of these models to estimate the impact of the Tax Reform Act of 1986. The model that the authors use is composed of three recursive equations: a dividend payout rate equation, a leverage equation, and an investment equation. The equations are estimated and simulated with U.S. aggregate data. The authors find that the Tax Reform Act of 1986 will increase the dividend payout rate, reduce leverage, and may decrease the after-tax real cost of financing in the long run. On the other hand, mainly because of the removal of the Investment Tax Credit, the authors expect a significant reduction in corporate investment in machinery and equipment in the long run.

Suggested Citation

  • Serge Nadeau & Robert P. Strauss, 1991. "Tax Policies and the Real and Financial Decisions of the Firm: the Effects of the Tax Reform Act of 1986," Public Finance Review, , vol. 19(3), pages 251-292, July.
    • Handle: RePEc:sae:pubfin:v:19:y:1991:i:3:p:251-292
    DOI: 10.1177/109114219101900301
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/109114219101900301
    Download Restriction: no
    File URL: https://libkey.io/10.1177/109114219101900301?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Peterson, Pamela P. & Benesh, Gary A., 1983. "A Reexamination of the Empirical Relationship between Investment and Financing Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(4), pages 439-453, December.
    2. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    3. Robert E. Hall, 1985. "Real Interest and Consumption," NBER Working Papers 1694, National Bureau of Economic Research, Inc.
    4. Chirinko, Robert S. & Eisner, Robert, 1983. "Tax policy and investment in major U.S. macroeconomic econometric models," Journal of Public Economics, Elsevier, vol. 20(2), pages 139-166, March.
    5. Robert Ferber, 1967. "Determinants of Investment Behavior," NBER Books, National Bureau of Economic Research, Inc, number ferb67-1, March.
    6. 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.
    7. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. "On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-878, July.
    8. McCabe, George M., 1979. "The Empirical Relationship Between Investment and Financing: A New Look," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(1), pages 119-135, March.
    9. Mervyn A. King, 1974. "Taxation and the Cost of Capital," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(1), pages 21-35.
    10. J. Gregory Ballentine & Charles E. McLure, Jr., 1980. "Taxation and Corporate Financial Policy," NBER Working Papers 0243, National Bureau of Economic Research, Inc.
    11. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    12. Fischer, Stanley & Merton, Robert C., 1984. "Macroeconomics and finance: The role of the stock market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 57-108, January.
    13. Phoebus J. Dhrymes & Mordecai Kurz, 1967. "Investment, Dividend, and External Finance Behavior of Firms," NBER Chapters, in: Determinants of Investment Behavior, pages 427-485, National Bureau of Economic Research, Inc.
    14. Martin Feldstein & Jerry Green & Eytan Sheshinski, 1979. "Corporate Financial Policy and Taxation in a Growing Economy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 411-432.
    15. 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.
    16. 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.
    17. Feige, Edgar L & Pearce, Douglas K, 1976. "Economically Rational Expectations: Are Innovations in the Rate of Inflation Independent of Innovations in Measures of Monetary and Fiscal Policy?," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 499-522, June.
    18. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    19. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 455-516.
    20. Dotan, Amihud & Ravid, S Abraham, 1985. "On the Interaction of Real and Financial Decisions of the Firm under Uncertainty," Journal of Finance, American Finance Association, vol. 40(2), pages 501-517, June.
    21. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    22. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    23. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    24. J. S. S. Edwards & M. J. Keen, 1984. "Wealth Maximization and the Cost of Capital: A Comment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(1), pages 211-214.
    25. Musgrave, Richard A, 1987. "Short of Euphoria," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 59-71, Summer.
    26. Poterba, James M. & Summers, Lawrence H., 1983. "Dividend taxes, corporate investment, and `Q'," Journal of Public Economics, Elsevier, vol. 22(2), pages 135-167, November.
    27. Dammon, Robert M & Senbet, Lemma W, 1988. " The Effect of Taxes and Depreciation on Corporate Investment and Financial Leverage," Journal of Finance, American Finance Association, vol. 43(2), pages 357-373, June.
    28. Fama, Eugene F, 1974. "The Empirical Relationships Between the Dividend and Investment Decisions of Firms," American Economic Review, American Economic Association, vol. 64(3), pages 304-318, June.
    29. J. Gregory Ballentine & Charles E. McLure, 1980. "Taxation and Corporate Financial Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 351-372.
    30. Brunner, Karl & Meltzer, Allan H., 1984. "Essays on macroeconomic implications of financial and labor markets and political processes," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 1-8, January.
    31. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 433-446.
    32. Randall Pozdena, 1987. "Tax policy and corporate capital structure," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 37-51.
    33. 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.
    34. Brimmer, Andrew F & Sinai, Allen, 1976. "The Effects of Tax Policy on Capital Formation, Corporate Liquidity and the Availability of Investible Funds: A Simulation Study," Journal of Finance, American Finance Association, vol. 31(2), pages 287-308, May.
    35. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    36. Ben S. Bernanke & John Y. Campbell, 1988. "Is There a Corporate Debt Crisis?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 83-140.
    37. Anderson, G J, 1983. "The Internal Financing Decisions of the Industrial and Commercial Sector: A Reappraisal of the Lintner Model of Dividend Disbursements," Economica, London School of Economics and Political Science, vol. 50(199), pages 235-248, August.
    38. Shefrin, Hersh M. & Statman, Meir, 1984. "Explaining investor preference for cash dividends," Journal of Financial Economics, Elsevier, vol. 13(2), pages 253-282, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292, Elsevier.
    2. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    3. William M. Gentry & R. Glenn Hubbard, 1998. "Fundamental Tax Reform and Corporate Financial Policy," NBER Working Papers 6433, National Bureau of Economic Research, Inc.
    4. François Gourio & Jianjun Miao, 2010. "Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 131-168, January.
    5. Hans-Werner Sinn, 1991. "Taxation and the Cost of Capital: The "Old" View, the "New" View, and Another View," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 25-54, National Bureau of Economic Research, Inc.
    6. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    7. Jack Mintz, 1995. "Corporation tax: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 16(4), pages 23-68, November.
    8. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    9. Richard W. Kopcke, 1995. "Tobin's Q, economic rents, and the optimal stock of capital," Working Papers 95-4, Federal Reserve Bank of Boston.
    10. Cummins, Jason G. & Hassett, Kevin A. & Hubbard, R. Glenn, 1996. "Tax reforms and investment: A cross-country comparison," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 237-273, October.
    11. Trevor S. Harris & R. Glenn Hubbard & Deen Kemsley, 1999. "The Share Price Effects of Dividend Taxes and Tax Imputation Credits," NBER Working Papers 7445, National Bureau of Economic Research, Inc.
    12. Richard W. Kopcke, 1992. "Tobin's Q, economic rents, and the optimal stock of capital," Working Papers 92-3, Federal Reserve Bank of Boston.
    13. Patrick Artus & Philippe Ducos & Francois Lecointe, 1992. "Rachats d'entreprise avec endettement (LBO et MBO) : motivations micro-économiques, effets sur l'efficacité des entreprises et risques macro-économiques," Économie et Prévision, Programme National Persée, vol. 102(1), pages 89-104.
    14. Noronha, Gregory M. & Shome, Dilip K. & Morgan, George E., 1996. "The monitoring rationale for dividends and the interaction of capital structure and dividend decisions," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 439-454, April.
    15. Dickescheid, Thomas, 2002. "Steuerwettbewerb und Direktinvestitionen," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 16, number urn:isbn:9783161477348, December.
    16. Auerbach, Alan J., 1984. "Taxes, firm financial policy and the cost of capital: An empirical analysis," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 27-57.
    17. Charles W. Calomiris & R. Glenn Hubbard, 1993. "Internal Finance and Investment: Evidence from the Undistributed Profits Tax of 1936-1937," NBER Working Papers 4288, National Bureau of Economic Research, Inc.
    18. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    19. Yu, Chih-Ping, 2015. "Financial policies on firm performance: The U.S. insurance industry before and after the global financial crisis," Economic Modelling, Elsevier, vol. 51(C), pages 391-402.
    20. Roger H. Gordon & Jeffrey K. MacKie-Mason, 1990. "Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form," NBER Working Papers 3222, National Bureau of Economic Research, Inc.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:pubfin:v:19:y:1991:i:3:p:251-292. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.