Corporate Income Taxation and Signaling
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.
|Date of creation:||1997|
|Date of revision:|
|Contact details of provider:|| Postal: 2424 Maile Way, Honolulu, HI 96822|
Web page: http://www.economics.hawaii.edu/
More information through EDIRC
|Order Information:|| Web: http://www.economics.hawaii.edu/research/working.html Email: |
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.:
- Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
- Innes, Robert, 1992. "Adverse selection, investment, and profit taxation," European Economic Review, Elsevier, vol. 36(7), pages 1427-1452, October.
- 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.
- 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.
- Roger H. Gordon & John D. Wilson, 1986. "Measuring the Efficiency Cost of Taxing Risky Capital Income," NBER Working Papers 1992, National Bureau of Economic Research, Inc.
- Ross, Stephen A, 1985. " Debt and Taxes and Uncertainty," Journal of Finance, American Finance Association, vol. 40(3), pages 637-57, July.
- Roger H. Gordon, 1981. "Taxation of Corporate Capital Income: Tax Revenues vs. Tax Distortions," NBER Working Papers 0687, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Hamilton, Jonathan H, 1987. "Taxation, Savings, and Portfolio Choice in a Continuous Time Model," Public Finance = Finances publiques, , vol. 42(2), pages 264-82.
- MacKie-Mason, Jeffrey K, 1990.
" Do Taxes Affect Corporate Financing Decisions?,"
Journal of Finance,
American Finance Association, vol. 45(5), pages 1471-93, December.
- 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.
- 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.
- 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.
- Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
- Stiglitz, Joseph E., 1976. "The corporation tax," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 303-311.
- 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.
- Poterba, James M., 1989. "Capital Gains Tax Policy Toward Entrepreneurship," National Tax Journal, National Tax Association, vol. 42(3), pages 375-89, September.
- 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.
- Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
- 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.
- John G. Riley, 1974.
UCLA Economics Working Papers
050, UCLA Department of Economics.
- Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
- 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.
- 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.
- Kenneth L. Judd, 1984. "Efficiency, Adverse Selection, and Production," Discussion Papers 606, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
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 references are entirely missing, you can add them using this form.