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Government Debt and Private Leverage: An Extension of the Miller Theorem

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  • Robert L. McDonald

Abstract

This paper shows how government financing decisions can influence the corporate decision to use debt or equity finance. In particular, it is shown that an increase in the stock of taxable government debt reduces the equilibrium quantity of corporate debt, and that an increase in the stock of tax-free government debt reduces the equilibrium quantity of corporate equity. The effects of inflation rate and tax rate changes are also considered.

Suggested Citation

  • Robert L. McDonald, 1982. "Government Debt and Private Leverage: An Extension of the Miller Theorem," NBER Working Papers 0965, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0965
    Note: PE
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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    8. 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.
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