The Equity Trap, the Cost of Capital and the Firm´s Growth Path
This paper reconsiders Sinn’s (1991) nucleus theory of the corporation by comparing two different regimes for the equity trap. In the first of these, all cash paid to the shareholders is taxed as dividends, in the second, shareholders are allowed a tax-free return of capital contributed through new issues. A substantial difference is found between the regimes in the seize of initial equity injections, although in both regimes, no dividends are paid until a new long-run equilibrium is reached. Contrary to Sinn, we find that with optimal behavior, the cost of new equity is lower than suggested by conventional formulae.
|Date of creation:||05 Sep 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden|
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