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Asymmetric Information, Capital and Ownership Structures and Corporate Income Taxation

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Listed:
  • Kwang Soo Cheong

    (Department of Economics, University of Hawaii at Manoa)

Abstract

This paper develops a signaling model to investigate a firm's optimal financial response to corporate income taxation under informational asymmetries. The model obtains informationally constrained efficient equilibria in which a firm's debt level and inside equity position jointly serve as a single separating signal. Separating equilibria are characterized differently depending upon the tax obligation and the relative profitability of a high-quality firm. When the quality difference between firms is relatively large, a high-quality firm shows a unique optimal capital structure, in which the debt-equity ratio is increased as the tax rate rises but is reduced as the firm's profitability increases.

Suggested Citation

  • Kwang Soo Cheong, 1999. "Asymmetric Information, Capital and Ownership Structures and Corporate Income Taxation," Working Papers 199904, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:199904
    as

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    File URL: http://www.economics.hawaii.edu/research/workingpapers/994.pdf
    File Function: First version, 1999
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    References listed on IDEAS

    as
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    4. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    5. Kwang Soo Cheong, 1998. "Corporate Income Taxation and Signaling," Public Finance Review, , vol. 26(5), pages 480-502, September.
    6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    7. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    8. Evsey D. Domar & Richard A. Musgrave, 1944. "Proportional Income Taxation and Risk-Taking," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 58(3), pages 388-422.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Francesco Cohen & Alessandro Fedele & Paolo M. Panteghini, 2016. "Corporate taxation and financial strategies under asymmetric information," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(1), pages 9-34, April.
    2. Thomas Bauer & Thomas Kourouxous & Peter Krenn, 2018. "Taxation and agency conflicts between firm owners and managers: a review," Business Research, Springer;German Academic Association for Business Research, vol. 11(1), pages 33-76, February.

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    More about this item

    Keywords

    Corporate Income Taxation; Capital Structure; Asymmetric Information;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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