IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Corporate Income Taxation and Signaling

  • Kwang Soo Cheong
Registered author(s):

    A signalling model is developed to investigate the consequences of corporate income taxation in the presence of adverse selection in the equity market. The model obtains a unique, informationally-constrained efficient equilibrium in which a better quality firm retains more inside-equity, and, as in the complete information case, only profitable firms are supported. The corporate income tax affects signalling costs as well as the profitability of projects. Numerical experiments with exponential utility functions find that the inside-equity position of a better quality firm increases as the corporate income tax rate rises. This reaction is, however, insensitive to the tax rate change due to the risk-sharing with the government, which leads to the interesting result that the corporate income tax only incurs a lower welfare cost than the lump sum tax with the same tax revenue.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.economics.hawaii.edu/research/workingpapers/88-98/WP_97-13.pdf
    Download Restriction: no

    Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 199713.

    as
    in new window

    Length: 30 pages
    Date of creation: 1997
    Date of revision:
    Handle: RePEc:hai:wpaper:199713
    Contact details of provider: Postal: 2424 Maile Way, Honolulu, HI 96822
    Phone: (808)956-8730
    Fax: (808)956-4347
    Web page: http://www.economics.hawaii.edu/
    Email:


    More information through EDIRC

    Order Information: Web: http://www.economics.hawaii.edu/research/working.html Email:


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Batra, Raveendra N., 1975. "A general equilibrium model of the incidence of corporation income tax under uncertainty," Journal of Public Economics, Elsevier, vol. 4(4), pages 343-360, November.
    2. 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.
    3. Ratti, Ronald A. & Shome, Parthasarathi, 1977. "On a general equilibrium model of the incidence of the corporation tax under uncertainty," Journal of Public Economics, Elsevier, vol. 8(2), pages 233-238, October.
    4. Poterba, James M., 1989. "Capital Gains Tax Policy Toward Entrepreneurship," National Tax Journal, National Tax Association, vol. 42(3), pages 375-89, September.
    5. Grinblatt, Mark & Hwang, Chuan Yang, 1989. " Signalling and the Pricing of New Issues," Journal of Finance, American Finance Association, vol. 44(2), pages 393-420, June.
    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. John G. Riley, 1974. "Competitive Signalling," UCLA Economics Working Papers 050, UCLA Department of Economics.
    8. John, Kose & Williams, Joseph, 1985. " Dividends, Dilution, and Taxes: A Signalling Equilibrium," Journal of Finance, American Finance Association, vol. 40(4), pages 1053-70, September.
    9. Kenneth L. Judd, 1984. "Efficiency, Adverse Selection, and Production," Discussion Papers 606, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    10. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    11. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
    12. 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 357-73, June.
    13. Ross, Stephen A, 1985. " Debt and Taxes and Uncertainty," Journal of Finance, American Finance Association, vol. 40(3), pages 637-57, July.
    14. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    15. Gordon, Roger H & Wilson, John Douglas, 1989. "Measuring the Efficiency Cost of Taxing Risky Capital Income," American Economic Review, American Economic Association, vol. 79(3), pages 427-39, June.
    16. Scott, James H, Jr, 1977. "Bankruptcy, Secured Debt, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 32(1), pages 1-19, March.
    17. Hamilton, Jonathan H, 1987. "Taxation, Savings, and Portfolio Choice in a Continuous Time Model," Public Finance = Finances publiques, , vol. 42(2), pages 264-82.
    18. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    19. Stiglitz, Joseph E., 1976. "The corporation tax," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 303-311.
    20. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc.
    21. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
    22. Innes, Robert, 1992. "Adverse selection, investment, and profit taxation," European Economic Review, Elsevier, vol. 36(7), pages 1427-1452, October.
    23. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
    24. Talmor, Eli, 1981. "Asymmetric Information, Signaling, and Optimal Corporate Financial Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 413-435, November.
    25. Roger H. Gordon, 1981. "Taxation of Corporate Capital Income: Tax Revenues vs. Tax Distortions," NBER Working Papers 0687, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:hai:wpaper:199713. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Web Technician)

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.