IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/0370.html
   My bibliography  Save this paper

The Decline in Aggregate Share Values: Inflation, Taxation, Risk and Profitability

Author

Listed:
  • Patric H. Hendershott

Abstract

With a neutral tax system an increase in observed and anticipated inflation would not be expected to alter either real after-tax yields on bonds and equities or the ratio of the market value of equities to the replacement cost of corporate real capital. In the real world, however, declines in real after-tax bond yields and the relative value of shares have been observed. Feldstein (1976, 1978) has attributed both of these phenonema to the use of historic-cost depreciation, and the taxation of nominal capital gains. Our analysis supports his conjecture regarding the decline in real after-tax debt yields, but rejects his analysis of the cause of the decline in share values. The decline in share values can be attributed to many factors, but the most important is probably the favorable taxation of income from owner-occupied housing (no taxation of either implicit rents nor real capital gains). As a result housing has become more attractive with the acceleration of inflation, and households have substituted housing for equity shares. Other possible sources of the decline in share values are reduced profitability of existing capital, owing to increased regulatory costs and real energy prices, and a greater perceived risk in business operations.

Suggested Citation

  • Patric H. Hendershott, 1979. "The Decline in Aggregate Share Values: Inflation, Taxation, Risk and Profitability," NBER Working Papers 0370, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0370
    Note: PE ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w0370.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Robert W. Crandall, 1978. "Federal Government Initiatives to Reduce the Price Level," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(2), pages 401-452.
    2. Gordon, Myron J & Halpern, Paul J, 1976. "Bond Share Yield Spreads under Uncertain Inflation," American Economic Review, American Economic Association, vol. 66(4), pages 559-565, September.
    3. Martin Feldstein & Lawrence Summers, 1977. "Is the Rate of Profit Falling?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 211-228.
    4. Martin Feldstein & Jerry Green & Eytan Sheshinski, 1983. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 44-60 National Bureau of Economic Research, Inc.
    5. Martin Feldstein, 1983. "Inflation and the Stock Market," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 186-198 National Bureau of Economic Research, Inc.
    6. Cook, Timothy Q & Hendershott, Patric H, 1978. "The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials," Journal of Finance, American Finance Association, vol. 33(4), pages 1173-1186, September.
    7. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
    8. James Tobin & William C. Brainard, 1976. "Asset Markets and the Cost of Capital," Cowles Foundation Discussion Papers 427, Cowles Foundation for Research in Economics, Yale University.
    9. Patric H. Hendershott & Sheng Cheng Hu, 1979. "Inflation and the Benefits from Owner-Occupied Housing," NBER Working Papers 0383, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Feldstein, Martin, 1980. "Tax Rules and the Mismanagment of Monetary Policy," American Economic Review, American Economic Association, vol. 70(2), pages 182-186, May.
    2. Martin Feldstein, 1983. "Inflation, Tax Rules, and the Stock Market," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 199-220 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:0370. 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: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.