IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/0254.html

Wealth Maximization and the Cost of Capital

Author

Listed:
  • Alan J. Auerbach

Abstract

In this paper we explore the issue of wealth maximization and the implied behavior of the firm, paying particular attention to the results discussed above and how they are affected by the existence of capital income taxes. Our results indicate that a tax structure similar to that in existence in the United States influences the cost of capital in a very different way than has been assumed previously and that the relative advantages of debt over equity as a method of finance, and capital gains over dividends as a vehicle for personal realization of corporate profits, may have been greatly overstated. These findings may help to explain certain aspects of corporate financial behavior that have seemed puzzling.

Suggested Citation

  • Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0254
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w0254.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stapleton, R C, 1972. "Taxes, the Cost of Capital and the Theory of Investment," Economic Journal, Royal Economic Society, vol. 82(328), pages 1273-1292, December.
    2. 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.
    3. 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.
    4. 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.
    5. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    6. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
    7. 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.
    8. 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.
    9. Gordon Pye, 1972. "Preferential Tax Treatment of Capital Gains, Optimal Dividend Policy, and Capital Budgeting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 86(2), pages 226-242.
    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. 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.
    2. Alan J. Auerbach, 2006. "Who Bears the Corporate Tax? A Review of What We Know," NBER Chapters, in: Tax Policy and the Economy, Volume 20, pages 1-40, National Bureau of Economic Research, Inc.
    3. 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.
    4. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
    5. Magnus Henrekson & Tino Sanandaji, 2011. "Entrepreneurship and the theory of taxation," Small Business Economics, Springer, vol. 37(2), pages 167-185, September.
    6. Martin Feldstein, 1983. "Inflation, Tax Rules, and Investment: Some Econometric Evidence," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 243-286, National Bureau of Economic Research, Inc.
    7. Schönemann, Kristin, 2009. "Finanzierungsstrategien und ihre Auswirkungen auf den Unternehmenswert deutscher Immobilien-Kapitalgesellschaften," arqus Discussion Papers in Quantitative Tax Research 94, arqus - Arbeitskreis Quantitative Steuerlehre.
    8. 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.
    9. Henrekson, Magnus & Sanandaji, Tino, 2016. "Owner-Level Taxes and Business Activity," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 12(1), pages 1-94, March.
    10. Bernstein, Jeffrey I. & Nadiri, M. Ishaq, 1982. "Financing and Investment in Plant and Equipment and Research and Development," Working Papers 82-27, C.V. Starr Center for Applied Economics, New York University.
    11. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    12. 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.
    13. McGee, M. Kevin, 1998. "Capital Gains Taxation and New Firm Investment," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 653-73, December.
    14. Michael L. McIntyre, 2022. "Capital structure in an option-theoretic setting," SN Business & Economics, Springer, vol. 2(8), pages 1-24, August.
    15. William M. Gentry & R. Glenn Hubbard, 1998. "Fundamental Tax Reform and Corporate Financial Policy," NBER Working Papers 6433, National Bureau of Economic Research, Inc.
    16. Jane G. Gravelle & Dennis Zimmerman, 1984. "Tax Progressivity and the Design of Tax Incentives for Investment," Public Finance Review, , vol. 12(3), pages 251-289, July.
    17. 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.
    18. Joel B. Slemrod, 1983. "A General Equilibrium Model of Taxation with Endogenous Financial Behavior," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 427-458, National Bureau of Economic Research, Inc.
    19. Weichenrieder, Alfons J., 1998. "Foreign profits and domestic investment," Journal of Public Economics, Elsevier, vol. 69(3), pages 451-463, September.
    20. Don Fullerton & Roger H. Gordon, 1983. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 369-426, 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:nbr:nberwo:0254. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    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.