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Share Valuation and Corporate Equity Policy

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Author Info
Alan J. Auerbach

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Abstract

In recent years many contributions have appeared which examine the effects of corporate and personal taxation on firm financial policy. However, there has yet to appear an adequate explanation of why corporations continue to distribute dividends despite their disadvantageous tax treatment. We study this problem anew, in the context of an overlapping generations growth model with corporations financed by equity. Among our findings are: (1) capital owned by corporations may well be undervalued, even in the long run; (2) as a result of such undervaluation, firms may find it in the best interest of their stockholders to distribute dividends; and (3) an increase in the tax on distributions, while depressing the return to personal saving, may lead to an increase in the capital intensity of the economy. We also consider the criterion firms will use in evaluating new investment projects.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0255.

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Date of creation: Jan 1980
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Handle: RePEc:nbr:nberwo:0255

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Diamond, Peter A., 1970. "Incidence of an interest income tax," Journal of Economic Theory, Elsevier, vol. 2(3), pages 211-224, September. [Downloadable!] (restricted)
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  2. Stapleton, R C, 1972. "Taxes, the Cost of Capital and the Theory of Investment," Economic Journal, Royal Economic Society, vol. 82(328), pages 1273-92, December. [Downloadable!] (restricted)
  3. Flemming, J. S., 1976. "A reappraisal of the corporation income tax," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 163-169. [Downloadable!] (restricted)
  4. Stiglitz, Joseph E., 1976. "The corporation tax," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 303-311. [Downloadable!] (restricted)
  5. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Blackwell Publishing, vol. 41(1), pages 21-35, January. [Downloadable!] (restricted)
  6. Feldstein, Martin S, 1970. "Inflation, Specification Bias, and the Impact of Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 78(6), pages 1325-39, Nov.-Dec.. [Downloadable!] (restricted)
  7. Feldstein, Martin S, 1974. "Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rates," Review of Economic Studies, Blackwell Publishing, vol. 41(4), pages 505-13, October. [Downloadable!] (restricted)
  8. Feldstein, Martin S & Green, Jerry & Sheshinski, Eytan, 1979. "Corporate Financial Policy and Taxation in a Growing Economy," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 411-32, August. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Henrekson, Magnus & Sanandaji, Tino, 2008. "Entrepreneurship and the Theory of Taxation," Working Paper Series 732, Research Institute of Industrial Economics, revised 19 Aug 2009. [Downloadable!]
  2. Tobias Lindhe & Jan Södersten & Ann Öberg, 2004. "Economic Effects of Taxing Different Organizational Forms under the Nordic Dual Income Tax," Asia-Pacific Financial Markets, Springer, vol. 11(4), pages 469-485, August. [Downloadable!] (restricted)
    Other versions:
  3. Martin Feldstein, 1981. "Inflation and the Stock Market," NBER Working Papers 0276, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Francois Gourio & Jianjun Miao, 2006. "Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-160, Boston University - Department of Economics. [Downloadable!]
  5. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Julie H. Collins & John R. M. Hand & Douglas A. Shackelford, 2000. "Valuing Deferral: The Effect of Permanently Reinvested Foreign Earnings on Stock Prices," NBER Chapters, in: International Taxation and Multinational Activity, pages 143-172 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Trevor S. Harris & R. Glenn Hubbard & Deen Kemsley, 1999. "The Share Price Effects of Dividend Taxes and Tax Imputation Credits," NBER Working Papers 7445, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Alan J. Auerbach & Kevin A. Hassett, 2000. "On the Marginal Source of Investment Funds," NBER Working Papers 7821, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Laurence J. Kotlikoff & Lawrence H. Summers, 1988. "Tax Incidence," NBER Working Papers 1864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Kotlikoff, Laurence J. & Summers, Lawrence H., 1987. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 16, pages 1043-1092 Elsevier. [Downloadable!] (restricted)
  10. Martin Feldstein & Stephanie Seligman, 1981. "Pension Funding, Share Prices, and National Saving," NBER Working Papers 0509, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Alan J. Auerbach & Kevin A. Hassett, 2005. "The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study," NBER Working Papers 11449, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Martin Feldstein & James M. Poterba, 1984. "State and Local Taxes and the Rate of Return on Nonfinancial Corporate Capital (revised as W0740)," NBER Working Papers 0508, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Alberto Giovannini & James R. Hines, Jr., 1990. "Capital Flight and Tax Competition: Are There Viable Solutions to Both Problems?," NBER Working Papers 3333, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. William M. Gentry & Deen Kemsley & Christopher J. Mayer, 2001. "Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts," NBER Working Papers 8486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Lindhe, Tobias & Södersten, Jan & Öberg, Ann, 2001. "Economic Effects of Taxing Closed Corporations under a Dual Income Tax," Working Paper Series 2001:16, Uppsala University, Department of Economics. [Downloadable!]
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  17. Alan J. Auerbach, 2001. "Taxation and Corporate Financial Policy," NBER Working Papers 8203, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Darrel Cohen & Kevin A. Hassett, 1997. "Inflation, taxes, and the durability of capital," Finance and Economics Discussion Series 1997-53, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  19. Ayla Kayhan & Sheridan Titman, 2004. "Firms' Histories and Their Capital Structures," NBER Working Papers 10526, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Martin Feldstein, 1980. "Inflation, Tax Rules, and the Stock Market," NBER Working Papers 0403, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  21. Lindhe, Tobias, 2002. "The Marginal Source of Finance," Working Paper Series 2002:9, Uppsala University, Department of Economics. [Downloadable!]
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