IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v19y2011i1p21-40.html
   My bibliography  Save this article

Optimal dividend policy, debt policy and the level of investment within a multi-period DCF framework

Author

Listed:
  • Lally, Martin

Abstract

This paper simultaneously analyses optimal dividend, debt and investment policy within a conventional multi-period DCF framework, and takes account of differential personal taxation over both investors and types of income, the effect of dividends and interest on the level of share issues and hence share issue costs, and the effect of dividends and interest on the level of internally-financed investment. Application of the model to three distinct tax regimes reveals that the value benefit from debt is small at best whilst the value benefit from dividends is substantial even in a regime without dividend imputation.

Suggested Citation

  • Lally, Martin, 2011. "Optimal dividend policy, debt policy and the level of investment within a multi-period DCF framework," Pacific-Basin Finance Journal, Elsevier, vol. 19(1), pages 21-40, January.
    • Handle: RePEc:eee:pacfin:v:19:y:2011:i:1:p:21-40
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927-538X(10)00045-4
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Green, Richard C. & Hollifield, Burton, 2003. "The personal-tax advantages of equity," Journal of Financial Economics, Elsevier, vol. 67(2), pages 175-216, February.
    2. Skinner, Douglas J., 2008. "The evolving relation between earnings, dividends, and stock repurchases," Journal of Financial Economics, Elsevier, vol. 87(3), pages 582-609, March.
    3. Lally, Martin, 2000. "Valuation of companies and projects under differential personal taxation," Pacific-Basin Finance Journal, Elsevier, vol. 8(1), pages 115-133, March.
    4. DeAngelo, Harry & Masulis, Ronald W, 1980. "Leverage and Dividend Irrelevancy under Corporate and Personal Taxation," Journal of Finance, American Finance Association, vol. 35(2), pages 453-464, May.
    5. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, vol. 57(4), pages 1649-1684, August.
    6. Masulis, Ronald W. & Trueman, Brett, 1988. "Corporate Investment and Dividend Decisions under Differential Personal Taxation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(4), pages 369-385, December.
    7. Dammon, Robert M & Spatt, Chester S & Zhang, Harold H, 2001. "Optimal Consumption and Investment with Capital Gains Taxes," The Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 583-616.
    8. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    9. Heitor Almeida & Thomas Philippon, 2007. "The Risk‐Adjusted Cost of Financial Distress," Journal of Finance, American Finance Association, vol. 62(6), pages 2557-2586, December.
    10. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    11. Miles, James A & Ezzell, John R, 1985. "Reformulating Tax Shield Valuation: A Note," Journal of Finance, American Finance Association, vol. 40(5), pages 1485-1492, December.
    12. Hamada, Robert S, 1972. "The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks," Journal of Finance, American Finance Association, vol. 27(2), pages 435-452, May.
    13. 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.
    14. repec:bla:jfinan:v:53:y:1998:i:5:p:1443-1493 is not listed on IDEAS
    15. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
    16. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    17. Lally, Martin & Marsden, Alastair, 2004. "Tax-adjusted market risk premiums in New Zealand: 1931-2002," Pacific-Basin Finance Journal, Elsevier, vol. 12(3), pages 291-310, June.
    18. Fung, William K. H. & Theobald, Michael F., 1984. "Dividends and Debt under Alternative Tax Systems," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(1), pages 59-72, March.
    19. Boyle, Glenn W, 1996. "Corporate Investment and Dividend Tax Imputation," The Financial Review, Eastern Finance Association, vol. 31(1), pages 209-226, February.
    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. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    2. Norman Schuerhoff, 2004. "Capital Gains Taxes, Irreversible Investment, and Capital Structure," 2004 Meeting Papers 688, Society for Economic Dynamics.
    3. Fernandez, Pablo, 2005. "Financial literature about discounted cash flow valuation," IESE Research Papers D/606, IESE Business School.
    4. Maßbaum, Alexandra & Sureth, Caren, 2008. "The impact of thin capitalization rules on shareholder financing," arqus Discussion Papers in Quantitative Tax Research 39, arqus - Arbeitskreis Quantitative Steuerlehre.
    5. Grinblatt, Mark & Liu, Jun, 2008. "Debt policy, corporate taxes, and discount rates," Journal of Economic Theory, Elsevier, vol. 141(1), pages 225-254, July.
    6. Lally, Martin, 2000. "Valuation of companies and projects under differential personal taxation," Pacific-Basin Finance Journal, Elsevier, vol. 8(1), pages 115-133, March.
    7. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    8. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    9. repec:dau:papers:123456789/9153 is not listed on IDEAS
    10. Clemens Sialm, 2009. "Tax Changes and Asset Pricing," American Economic Review, American Economic Association, vol. 99(4), pages 1356-1383, September.
    11. Andres, Christian & Doumet, Markus & Fernau, Erik & Theissen, Erik, 2015. "The Lintner model revisited: Dividends versus total payouts," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 56-69.
    12. Kulchania, Manoj, 2013. "Catering driven substitution in corporate payouts," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 180-195.
    13. Lin, Shannon & Tong, Naqiong & Tucker, Alan L., 2014. "Corporate tax aggression and debt," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 227-241.
    14. Schmid, Thomas & Ampenberger, Markus & Kaserer, Christoph & Achleitner, Ann-Kristin, 2010. "Controlling shareholders and payout policy: do founding families have a special 'taste for dividends'?," CEFS Working Paper Series 2010-01, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    15. Jacob, Martin & Alstadsæter, Annette, 2013. "Payout policies of privately held firms: Flexibility and the role of income taxes," arqus Discussion Papers in Quantitative Tax Research 152, arqus - Arbeitskreis Quantitative Steuerlehre.
    16. Deen Kemsley & Padmakumar Sivadasan & Venkat Subramaniam, 2018. "The composite dividend tax rate," Accounting and Business Research, Taylor & Francis Journals, vol. 48(7), pages 727-758, November.
    17. David G. Kenchington, 2019. "Does a change in dividend tax rates in the U.S. affect equity prices of non-U.S. stocks?," Review of Accounting Studies, Springer, vol. 24(2), pages 593-628, June.
    18. Warwick Anderson & Wen Kang, 2018. "The Relative Announcement Effects of Ordinary Dividends, Special Dividends and Share Buybacks in New Zealand," Working Papers in Economics 18/02, University of Canterbury, Department of Economics and Finance.
    19. Denis, David J. & Osobov, Igor, 2008. "Why do firms pay dividends? International evidence on the determinants of dividend policy," Journal of Financial Economics, Elsevier, vol. 89(1), pages 62-82, July.
    20. Zakamulin, Valeriy & Hunnes, John A., 2021. "Stock earnings and bond yields in the US 1871–2017: The story of a changing relationship," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 182-197.
    21. Lily Nguyen & Le Vu & Xiangkang Yin, 2021. "Share repurchases and firm innovation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 1665-1695, April.

    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:eee:pacfin:v:19:y:2011:i:1:p:21-40. 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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    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.