estimating the tax advantage of corporate debt this paper presents estimates of the effective tax value of incremental interest deductions for corporations taking into account that they may not be able to utilize all their interest deductions fully because of either insufficient taxable income or the availability of nondebt tax shields after describing particular features of the tax code which may drive a wedge between statutory and effective tax rates for debt finance we present estimates using the treasury corporate tax model of effective tax rates for a variety of industry groupings our estimates suggest that the after tax cost of debt varies widely across industries the magnitude of the effective tax advantage to debt finance has important implications for corporate financial behavior one issue which has been examined extensively in the corporate finance literature is whether the value of the firm is affected by the firm s leverage ratio in a recent contribution deangelo and masulis 3 have shown that financing decisions can affect the value of the firm if the effective tax advantage to debt finance varies among firms or is reduced by the presence of nondebt tax shields such as investment tax credits and depreciation deductions the effective tax advantage to debt is also an important determinant of leverage related costs gordon and malkiel 5 have recently used the statutory tax rate to estimate expected bankruptcy costs induced by the corporate tax when the firm is assumed to balance the marginal tax advantage to debt with marginal expected bankruptcy costs if however the effective tax rate for interest deductions falls short of the statutory rate the magnitude of these costs may be overstated this paper presents detailed estimates of the marginal effective tax advantage to debt finance our estimates based on data in the treasury 1978 corporate master statistical file and on simulations done with the treasury corporate tax model quantify the impact of increasing interest deductions without changing other items on the corporation s income statement 1 we simulate the impact of a change in a firm s capital structure holding its investment and production decisions constant this is an appropriate procedure for estimating the marginal

industry classifications and return comovement a company s industry affiliation is commonly used to construct homogeneous stock groupings for portfolio risk management relative valuation and peer group comparisons a variety of industry classification systems have been adopted however creating disagreements as to companies industry assignments this analysis of the global industry classification system gics and fama french system indicates that common movement in returns and operating performance resulting from industry effects is stronger for stocks of large companies than for those of small companies also increasingly fine levels of disaggregation improve discrimination up to six digit gics codes after which the benefits tail off stock groupings based on industry exhibit stronger out of sample homogeneity than groups formed from statistical cluster analysis

executive compensation strategic competition and relative performance evaluation theory and evidence we examine compensation contracts for managers in imperfectly competitive product markets we show that strategic interactions among firms can explain the lack of relative performance based incentives in which compensation decreases with rival firm performance the need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance firms in more competitive industries place greater weight on rival firm performance relative to own firm performance we find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry

tax arbitrage restrictions and financial leverage clienteles abstract this paper argues that while total short sale constraints are often introduced to rule out tax arbitrage such constraints are both unrealistic and conceptually problematic instead milder constraints are advocated which prevent tax arbitrage while still allow short positions it is demonstrated that a model with these constraints employed can support bond pricing as in the miller equilibrium although it leads to a richer set of tax clienteles

the growth of executive pay this paper examines both empirically and theoretically the growth of us executive pay during the period 1993 2003 during this period pay has grown much beyond the increase that could be explained by changes in firm size performance and industry classification had the relationship of compensation to size performance and industry classification remained the same in 2003 as it was in 1993 mean compensation in 2003 would have been only about half of its actual size during the 1993 2003 period equity based compensation has increased considerably in both new economy and old economy firms but this growth has not been accompanied by a substitution effect i e a reduction in non equity compensation the aggregate compensation paid by public companies to their top five executives during the considered period added up to about 350 billion and the ratio of this aggregate top five compensation to the aggregate earnings of these firms increased from 5 per cent in 1993 5 to about 10 per cent in 2001 3 after presenting evidence about the growth of pay we discuss alternative explanations for it we examine how this growth could be explained under either the arm s length bargaining model of executive compensation or the managerial power model among other things we discuss the relevance of the parallel rise in market capitalizations and in the use of equity based compensation copyright 2005 oxford university press

risk returns and values in the presence of differential taxation abstract we show that there exist separate security market lines smls for debt and equity securities in an equilibrium with differential taxation of debt and equity we characterize the conditions under which these smls have the same price of risk with different intercepts and the conditions under which the tax effect of leverage is linear in debt value as in the adjusted present value method we explore the implications of our results for cost of capital calculations how to calculate the cost of capital for debt and equity and how to unlever betas correctly accounting for differential taxation

financialization and u s income inequality 1970 2008 focusing on u s nonfinance industries we examine the connection between financialization and rising income inequality we argue that the increasing reliance on earnings realized through financial channels decoupled the generation of surplus from production strengthening owners and elite workers negotiating power relative to other workers the result was an incremental exclusion of the general workforce from revenue generating and compensation setting processes using time series cross section data at the industry level we find that increasing dependence on financial income in the long run is associated with reducing labor s share of income increasing top executives share of compensation and increasing earnings dispersion among workers net of conventional explanations such as deunionization globalization technological change and capital investment the effects of financialization on all three dimensions of income inequality are substantial our counterfactual analysis suggests that financial

are incentive contracts rigged by powerful ceos we argue that some powerful ceos induce boards to shift the weight on performance measures toward the better performing measures thereby rigging incentive pay a simple model formalizes this intuition and gives an explicit structural form on the rigged incentive portion of ceo wage function using u s data we find support for the model s predictions rigging accounts for at least 10 of the compensation to performance sensitivity and it increases with ceo human capital and firm volatility moreover a firm with rigged incentive pay that is one standard deviation above the mean faces a subsequent decrease of 4 8 in firm value and 7 5 in operating return on assets

family education and sources of wealth among the richest americans 1982 2012 we examine characteristics of the 400 wealthiest individuals in the u s over the past three decades as tabulated by forbes magazine and analyze which theories of increasing inequality are most consistent with these data the forbes 400 in recent years did not grow up as advantaged as in decades past they are more likely to have started their businesses and to have grown up upper middle class not wealthy today s forbes 400 were able to access education while young and apply their skills to the most scalable industries technology finance and mass retail most of the change occurred by 2001

the response of deferred executive compensation to changes in tax rates abstract given the increasing use of stock options in executive compensation we examine how taxes influence the choice of compensation and document that income deferral is an important margin of adjustment in response to tax rate changes to account for this option in the empirical analysis we explore deferral by estimating how executives choice of compensation between current and deferred income depends on changes in tax policy our empirical results suggest a significant impact of taxes on the composition of executive compensation

miller s irrelevance mechanism a note this note attempts to clarify miller s 12 capital structure irrelevance mechanism using a geometric edgeworth box diagrams presentation such an exercise is useful because miller s proposition is founded on analytically complex equilibrium arguments that tend to mask the intuition and logic behind his result since miller s original discussion unnecessarily assumed a zero tax on equity income and since miller did not prove his clientele effects rigorously we also focus our attention on the deangelo and masulis 8 9 henceforth d m generalization of the miller model the d m framework is also important because it assumes a proportional tax code as we shall see whether the tax code is proportional or progressive is an important factor in understanding miller s proposition

international capital structure equilibrium this paper develops a theory of capital structure in an international setting with corporate and personal taxes we generalize the miller analysis to an international equilibrium characterized by differential international taxation and inflation in otherwise perfect international capital markets our analysis highlights the key role that corporate tax arbitrage plays in generating an international capital structure equilibrium and we set forth a number of mechanisms for tax arbitrage transactions we close the paper by outlining some implications of our analysis for national differences in capital structure the international fisher effect and international tax effects on yield differentials among major questions regarding corporate capital structure which arise in an international setting are how or whether multiple tax jurisdictions and multiple currencies affect firm financing decisions and the international bond market equilibrium we examine some of these questions by way of generalizing miller s 1977 debt and taxes model into an international setting this setting allows for different tax regimes across countries as well as the possibility of differential inflation across currencies with consequent exchange rate movements in the first part of this paper we find that an international miller type equilibrium obtains under differential international taxation with capital market conditions which are otherwise analogous to those required for a domestic miller equilibrium our analysis particularly highlights the role that corporations play in miller s analysis as vehicles for tax arbitrage we show that if corporations engage in international tax arbitrage transactions on an equal footing no optimal capital structure exists for individual firms consequently without further restrictions differences in international tax rates alone are incapable of dictating a particular capital structure for an individual firm in the second part of the paper we extend the analysis to consider differential inflation rates with a consequent exchange rate movement and draw additional implications for the international analog of the miller equilibrium with differential inflation and taxation we begin by showing the existence of the international fisher effect for both equity and bonds although inflation and or exchange rate movements may affect real corporate tax subsidy rates and real

debt and taxes and uncertainty with a graduated personal tax schedule miller showed that there could be an equilibrium debt supply for the corporate sector as a whole in the presence of uncertainty there is also a unique debt equity ratio for each individual firm and this ratio is related to the firm s operational risk characteristics however if firms merge and spin off in response to tax incentives the identity of firms is ambiguous and only the corporate sector is a meaningful construct these arguments are developed in both discrete and continuous models that employ extensions of the arbitrage free pricing theory in his famous paper debt and taxes 1977 merton miller 11 showed that the original miller modigliani propositions on the irrelevance of capital structure were not necessarily overturned by considerations of taxation miller argued that with a broad enough span of progressivity in personal income taxation the corporate tax advantage to the issuance of debt would be offset by the disadvantage to investors of receiving ordinary income on personal account in equilibrium the differential rates of return on equity and debt would be such that the marginal investor would be indifferent between purchasing debt instruments or equity the margin would be determined by the total amount of debt issued by the corporate sector but in a competitive world it would be unaffected by the debt issued by any one firm as a consequence the total supply of corporate debt would be determined in equilibrium increasing to the point where aggregate corporate value was not enhanced by further debt financing but any individual firm would be looking at prices set at the margin and would find itself indifferent between issuing debt or equity the purpose of this article is to extend miller s argument by recognizing the differences between debt and equity when the environment is not certain we will not be concerned with what might be called corner questions i e with whether or not there is a marginal investor or an internal equilibrium to do so would obscure the basic points we have to make instead we will examine models that have internal equilibria and ordinary neoclassical marginal interpretations in related work de angelo and masulis 5 6 have also extended miller s analysis but their primary concern was with the effects of a more detailed treatment of the tax code and with the impact of bankruptcy we will deal with such matters only in passing our central concern is with the impact of uncertainty our main result is the finding that there is a relationship between the capital structure of the firm as induced by tax effects and ordinary beta measures

revenge of the managers labor cost cutting and the paradoxical resurgence of managerialism in the shareholder value era 1984 to 2001 institutional changes associated with the rise of shareholder value capitalism have had seemingly contradictory effects on managers and managerialism in the united states economy financial critiqu

ceo pay and firm size an update after the crisis in the size of stakes view quantitatively formalised in gabaix and landier 2008 ceo compensation reflects the size of rms aected by talent in a competitive market the years 2004 2011 were not part of the initial study and oer a laboratory to examine the theory with new positive and negative shocks executive compensation measured ex ante did closely track the evolution of average firm value supporting the size of stakes view out of sample during 2007 2009 rm value decreased by 17 and ceo pay by 28 during 2009 2011 firm value increased by 19 and ceo pay by 22

macroeconomic fluctuations as sources of luck in ceo compensation macroeconomic fluctuations in interest rates exchange rates and inflation can be considered sources of good or bad luck for corporate performance if management is unable to adjust operations to these fluctuations based on a sample of 2 091 us firms we decompose the impacts of macroeconomic fluctuations on three measures of ceo compensation our study provides empirical support for the importance of considering macroeconomic fluctuations in designing ceo incentive schemes it adds to the managerial power literature on moral hazard and ceo compensation by pinpointing the obvious risk that the ceo in an asymmetric and non linear reward system will be inclined to prioritize his her own cash flow at the expense of fulfilling an assumed agency role the policy conclusion for remuneration committees and board of directors is to filter out macroeconomic influences on performance to be rewarded whenever an asymmetric compensation scheme has been opted for

taxation portfolio choice and debt equity ratios a general equilibrium model this paper explores the portfolio behavior of investors differing with respect to both tax rates and risk aversion emphasizing the role of constraints on individual and firm behavior in ensuring the existence of and characterizing portfolio equilibrium under certain conditions on the securities available in the market which also are necessary for shareholders to be unanimous in supporting firm value maximization investors will be segmented by tax rate into two groups one specialized in equity and the other in debt though the relative wealths of the two groups determine the aggregate debt equity ratio each firm will be indifferent to its financial policy

taxation corporate financial policy and the cost of capital the cost of capital plays an important role in the allocation of resources among competing uses in a decentralized market system the purpose of this paper is to organize and present what is known and what is hypothesized about the effects of taxation on the incentive to invest via the cost of capital taking full account of important issues that arise independently from the question of taxation included in the analysis is a discussion of empirical findings about the interaction of inflation and taxation in influencing the incentive to invest and a treatment of taxation and uncertainty this abstract was borrowed from another version of this item

justifying social discounting the rank discounted utilitarian approach the popular discounted utilitarian criterion for infinite horizon social choice has been criticized on the ground that it treats successive generations unfairly i propose to evaluate intergenerational welfare with a rank discounted utilitarian rdu criterion instead the criterion amounts to discounted utilitarianism on non decreasing paths but it treats all generations impartially discounting becomes the mere expression of intergenerational inequality aversion i show that more inequality averse rdu societies have higher social discount rates when future generations are better off i apply the rdu approach in two benchmark economic growth models and i prove that it promotes sustainable policies maximizing discounted utility

the interaction of corporate and government financing in general equilibrium this article develops a general equilibrium model for analyzing the in teraction of corporate financial and production decisions consumers behavior and government financing the authors use the model to inv estigate how changes in income tax rates and government debt policy a ffect production interest rates and consumer welfare they also sho w how changes in the different tax rates affect other tax rates in ge neral equilibrium copyright 1988 by the university of chicago