expected inflation and the real rates of interest on taxable and tax exempt bonds this paper analyzes the impact of inflation on rates of return on taxable corporate bonds and tax exempt municipal bonds the paper considers a differential tax system where the tax rate depen ds on both the identity of the investor and the source of income it also consid ers the possibility that inflation may induce investors to switch from holding one asset to holding another it is demonstrated that while inflation should increase the pre personal tax real rate of interest on taxable bonds it should reduce the real rate of interest on tax exempt bonds copyright 1987 by ohio state university press

tax adjusted discount rates this paper develops models for discount rates that are adjusted for the interest tax shields of an infra marginal firm in a general tax equilibrium where there is cross sectional variation in corporate tax rates under the assumption that the firm optimally maintains a predetermined debt ratio a tax adjusted riskless discount rate model is given for valuing certainty equivalents and a tax and risk adjusted discount rate model is given for valuing expected cash flows for the latter case the asset equity debt and tax shield betas are derived and a weighted average cost of capital interpretation is given the tax adjusted capm apt security market lines for expected returns in stock and bond markets both have the same slope but different intercepts a formula is also provided for the present value of the interest tax shield when the firm optimally maintains a predetermined debt level the analysis here also differs from the existing literature in the following respects it allows for cross sectional variation in corporate tax rates and personal tax rates it shows that the market values of risky and riskless interest tax shields differ only to the extent that tax laws provide for nonlinear taxation of gains and losses it also shows that interest tax shields should be discounted at a tax adjusted discount rate that reflects the fact that they accrue to equity investors rather than debt investors continuous time simplifications of the formulas in this paper and the previous literature are also given

refinancing profitability and capital structure abstract we revisit the well established puzzle that leverage is negatively correlated with measures of profitability in contrast we find that at times when firms are at or close to their optimal level of leverage the cross sectional correlation between profitability and leverage is positive at other times it is negative these results are consistent with dynamic trade off models in which infrequent capital structure rebalancing is optimal the time series of market leverage and profitability in the quarters prior to rebalancing events match the patterns predicted by these models our results are not driven by investment layouts market timing payout or mechanical mean reversion of leverage

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

valuing lost home production of dual earner couples using a life cycle model in which women divide their time between home and market work we establish a link between retirement wealth and the value of forgone home production we use data from the health and retirement study to estimate the model s parameters and adjust the growth rate of gdp to reflect reductions in non market output we find that the value of forgone home production is modest about 25 percent of women s measured earnings

the impact of inflation on the aggregate debt asset ratio this paper demonstrates that contrary to the results of previous studies the impact of inflation on the aggregate debt asset ratio cannot be determined theoretically however it is shown that inflation is likely to increase this ratio when personal income tax schedules are indexed to the price level and or when leverage related costs are relatively high and the personal tax rate on income from holding common stocks is relatively low studies concerning the effect of inflation on firms capital structure conclude that inflation enhances debt financing jaffe 9 modigliani and cohn 16 and modigliani 15 argue that nominal interest payments consist in part of true interest payments and in part of a compensation for the reduction in the real value of the principal the fact that firms are allowed to deduct their entire interest expense including the portion that is a return of principal reduces their cost of debt capital gordon 6 concludes that the equilibrium debt capital ratio rises when the inflation rate rises he argues that an increase in the nominal interest rate induced by inflation increases the tax advantage of debt financing thus debt financing becomes more attractive and a rise in leverage related costs is necessary to restore equilibrium gordon asserts that the increase in leveragerelated costs is brought about by an increase in the debt equity ratio all these studies however focus primarily on the tax benefits of debt financing to the corporation and implicitly assume that each firm has a unique optimal structure which may change with inflation in contrast miller 14 in a world without inflation concludes that firms are indifferent to their capital structure and that the aggregate debt equity ratio is determined by the ratio of the wealth of investors who for tax reasons choose to hold bonds to the wealth of those who choose to hold stocks this paper explicitly incorporates tax considerations of both investors and firms into the analysis of the effect of inflation on the aggregate corporate debtasset ratio it is demonstrated that the effect of inflation on the aggregate debtasset ratio cannot be determined theoretically however inflation is likely to increase this ratio when personal income tax schedules are indexed to the price level and or when leverage related costs are relatively high and the tax on income from holding common stocks is relatively low we consider an economy in which investors are subject to a progressive tax system income from corporate bonds

bankruptcy risk and optimal capital structure this study finds shortcomings in empirical tests of the capital structure irrelevance hypothesis the alternative hypothesis is that firms choose value maximizing mixes of debt and equity on account of bankruptcy costs and the tax deductibility of interest payments based upon the cross sectional implications of the tax shelter bankruptcy cost hypothesis an alternative test of the irrelevance hypothesis is performed the test examines the relationship between failure rates and leverage ratios for 36 lines of business the results are inconsistent with the irrelevance hypothesis in their landmark paper modigliani and miller 26 demonstrate that under certain assumptions the market value of a firm is independent of its capital structure these assumptions include the absence of taxes transactions costs and bankruptcy costs recently miller 24 has argued that the introduction of corporate and personal taxes does not alter the capital structure irrelevance result in the absence of bankruptcy costs 1 the inclusion of bankruptcy costs generally considered in conjunction with the tax deductibility of interest payments has led others to conclude that capital structure will affect the value of the firm 2 in this case value maximizing firms may choose optimal capital structures consisting of both debt and equity there have been numerous attempts to discriminate empirically between the miller irrelevance mi hypothesis and the tax shelter bankruptcy cost ts bc hypothesis several are discussed in section i of this paper there it is argued that studies attempting to measure directly the effect of changes in capital structure on firm values are subject to serious complications and are unable to discriminate between the mi and ts bc hypotheses other studies focus on cross sectional implications of the mi and ts bc hypotheses the cross sectional tests are based on the assertion that bankruptcy costs may tend to induce firms with greater business risk to include less debt in their capital structures whereas the mi hypothesis does not predict such a relationship unfortunately the existence of positive bankruptcy costs is not sufficient to ensure that the ts bc hypothesis will predict the inverse relation

stationary sunspot equilibria in a finance constrained economy abstract stationary sunspot equilibria are shown to exist in a production economy with infinite lived agents when it is not possible to borrow against future wage income equilibrium fluctuations exhibit persistence over time scales of the same order of magnitude as observed business cycles an active fiscal policy that stabilizes aggregate money expenditures can prevent such fluctuations

secular changes in wealth inequality and inheritance data suggest that the distribution of wealth among households in the usa and uk has become more equal over the last century though at least for the usa the pattern may have reversed recently this paper shows that a model in which all households save for life cycle reasons and some for dynastic purposes as well offers a possible or partial explanation the model predicts rising cross sectional equality of wealth when longevity increases there may also be implications about very recent changes expansion of social security programmes and government deficits can lead toward more wealth inequality slower growth may do the same

taxes and the theory of trade debt in this paper we show that taxes motivate the flow of trade credit without involving the assumption of credit market imperfections the direction of trade credit flow depends on the distribution of marginal tax rates among buyers and sellers in equilibrium the trade credit decision follows a tax induced clientele on both the supply and demand side a glance at the balance sheet of a typical corporation reveals the sizeable investment firms make in accounts receivable 1 in spite of its quantitative importance the analysis of trade credit policy figures far less prominently than other corporate policies in the finance literature although there exists a body of literature on the subject its focus is on the monetary policy implications of trade credit flow and therefore holds only indirect relevance to micro aspects such as the trade credit decision as part of corporate policy in this paper we examine the trade credit decision as a short term financing decision the decision to either grant or issue trade debt is analyzed in the familiar framework of miller 12 this approach establishes the link between existing paradigms on the financing of firms and the formulation of trade credit policies the existing literature provides three possible motives for trade credit they are respectively the transaction motive the price motive and the financial motive the first two motives have been discussed extensively elsewhere see for example smith 18 for a summary it is at the third motive the financial motive that the present paper is directed 2 past studies on the financial motive such as brechling and lipsey 3 jaffee and modigliani 7 laffer 10 schwartz 15 and schwartz and whitcomb 16

debt and taxes a multiperiod investigation abstract this paper extends the miller bond market equilibrium analysis to a multiperiod setting from the model developed we derive several predictions relating optimal financial leverage to firm characteristics and to the business cycle the analysis also reveals some interesting determinants of the market value of the tax subsidy associated with corporate debt

excess asset reversions and shareholder wealth the ownership of pension assets in a defined benefit pension plan is an unresolved issue in corporate finance the issue is important because it defines the appropriate investment policy for a pension fund in this paper we summarize the ownership debate in the form of two mutually exclusive theories we then focus on a recently popular event in pension finance excess asset reversions our paper demonstrates the valuation effects associated with this event in a stochastic dominance framework under certain conditions a reversion constitutes an expropriation of wealth from the participants and beneficiaries of the plan to the firm using data provided by the pension benefit guaranty corporation and the center for research in security prices tape we examine the returns to the shareholders of 58 companies which conducted excess asset reversions between 1980 and 1984 our results show that large abnormal returns accrued to these shareholders around the time of the reversion these findings have implications both for the appropriate investment policy of pension funds and for public policy with respect to plan terminations

an empirical reconciliation of the miller model and the generalized capital structure models abstract this paper uses time series techniques to demonstrate the compatibility of miller s capital structure model miller m h 1977 journal of finance 32 261 276 with generalized capital structure models from 1970 through 1985 the miller model represents a long run equilibrium because deviations from the miller equilibrium revert toward a mean close to zero while transitory shocks to the leverage related costs of debt and bank borrowing costs explain short run deviations from the miller equilibrium the typical levels of leverage related costs of debt and bank borrowing costs over the sample period do not cause deviations from the miller equilibrium

hedging financing and investment decisions theory and empirical tests abstract in this paper we theoretically and empirically examine the interaction between hedging financing and investment decisions a simple equilibrium model with costly financial distress suggests that as firms become more efficient at risky investments vis a vis low risk investments they will borrow less invest more in risky assets and hedge more the model also predicts a positive relationship between hedging and leverage a result consistent with debt capacity arguments we test the model empirically using a simultaneous equations framework to investigate the determinants of firm level hedging financing and investing decisions the results strongly support the hypothesis that the hedging financing and investment decisions are jointly determined in addition we find strong support for the central hypothesis that firms more efficient investing in risky technologies more aggressively hedge and use less debt financing in order to maximize their comparative advantage

bibliography of franco modigliani s publications 1944 1985 ed in the c f a digest the institute of chartered financial analysts vol 11 no 4 fall 1981 pp 15 16 166 financial markets the decades ahead an m i t perspective proceed ings of a symposium for senior executives the industrial liaison program of the massachusetts institute of technology june 1980 167 utility analysis and aggregate consumption functions an attempt at integration with richard brumberg the collected papers of franco modigliani the life cycle hypothesis of saving vol 2 ed a abel m i t press cambridge ma 1980 pp 128 97 168 the trade off between real wages and employment in an open economy belgium with jacques h dreze c o r e universite catholique de louvain discussion paper no 7947 1980 reprinted in european economic review 15 1981 pp 1 40 169 the stucture of financial markets and the monetary mechanism with lucas papademos controlling monetary aggregates iii conference series number 23 federal reserve bank of boston 1980 170 a new look at the monetary mechanism the 1980 w a mackintosh lecture queen s university discussion paper no 447 kingston ontario canada 1981 171 uma nova abordagem do mecanismo monetario e sue relacao com a estrutura financeira the monetary mechanism revisited and its relation with the financial structure revista de econometria sociedade brasileira de econometria 1 1 april 1981 pp 5 30 172 comment on scale of macro econometric models and accuracy of fore casting by g fromm and l r klein in j kmenta and j b ramsey eds large scale macro econometric models north holland 1981 pp 393 4 173 comment on where have all the flowers gone economic growth in the 1960s by robert m solow in j a pechman and n j simler eds economics in the public service papers in honor of walter w heller ww norton co inc 1981 pp 75 83 scand j of economics 1986 this content downloaded from 157 55 39 141 on mon 18 jul 2016 05 30 52 utc all use subject to http about jstor org terms

wealth inequality and intergenerational links previous work has had difficulty generating household saving behaviour that makes the distribution of wealth much more concentrated than that of labour earnings and that makes the richest households hold onto large amounts of wealth even during very old age i construct a quantitative general equilibrium overlapping generations model in which parents and children are linked by accidental and voluntary bequests and by earnings ability i show that voluntary bequests can explain the emergence of large estates while accidental bequests alone cannot and that adding earnings persistence within families increases wealth concentration even more i also show that the introduction of a bequest motive generates lifetime savings profiles more consistent with the data

fiscal policy in a growth model with both altruistic and nonaltruistic agents this paper examines the long run behavior of an overlapping generations model with a population consisting of altruistic and nonaltruistic agents it also studies the effect of fiscal policy on aggregate capital accumulation and on the welfare of both types of agents it shows that an increase in the relative number of nonaltruists is pareto improving in the steady state it also shows that the introduction of public debt or unfunded social security has no effect on the longrun equilibrium but implies a transfer of resources from the nonaltruistic to the altruistic agents finally it indicates that inheritance taxation hurts not only the altruists but also the nonaltruists

evidence of financial leverage clienteles estimates of the marginal ordinary tax rates of investors obtained from responses to a survey about their incomes were found to be only slightly negatively correlated with the debt ratios of the firms whose stock they held klm s failure to observe a strong negative correlation raises doubts concerning the existence of financial leverage clienteles the purpose of our study is to provide new evidence concerning financial leverage clienteles based on a different estimator of tax rates of shareholders the evidence indicates that personal tax rates tend to be highly negatively correlated with financial leverage providing support for the existence of financial leverage clienteles in the following section we discuss the miller and klm models of financial leverage clienteles section ii contains a description of the procedures used for estimating personal tax rates and a description of the data used to test the hypothesis of leverage clienteles results and implications of the tests are presented in section iii and section iv contains the summary

new evidence on altruism a study of tiaa cref retirees this paper investigates the role in household wealth accumulation of saving for bequests it employs data from a 1988 survey of tiaa cref annuitants designed to measure pension and other net worth as well as lifetime earnings about half of the households in the data plan to leave estates and the authors find that their behavior conforms with theoretical altruistic models for the same families the amount of wealth that the authors attribute to estate building is large nevertheless altruism towards one s children does not seem to be the major explanation of saving in the overall sample copyright 1996 by american economic association

risk aversion mandatory disclosure and the concealment of information abstract this paper studies a risk averse insider s reaction to mandatory disclosure regulations in particular we examine the effects of disclosure on price efficiency and market liquidity contrary to what people generally believe mandatory disclosure may lead to less efficient prices and less liquid markets

a general equilibrium theory of banks capital structure abstract we develop a general equilibrium theory of the capital structures of banks and firms the liquidity services of bank deposits make deposits a cheaper source of funding than equity in equilibrium banks pass on part of this funding advantage in the form of lower interest rates to firms that borrow from them firms and banks choose their capital structures to balance the benefits of debt financing against the risk of costly default an increase in the equity of a firm makes its debt less risky and that in turn reduces the risk of the banks who lend to the firm hence there is some substitutability between firm and bank equity we find that firms have a comparative advantage in providing a buffer against systemic shocks whereas banks have a comparative advantage in providing a buffer against idiosyncratic shocks

the effect of capital structure on a firm s liquidation decision abstract a firm s liquidation can impose costs on its customers workers and suppliers an agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm as the agent affects other individuals the customers workers and suppliers as principals the analysis in this paper suggests that capital structure can control the incentive conflict problem of this relationship by serving as a pre positioning or bonding mechanism appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex ante value maximizing liquidation policy

the role of intergenerational transfers and life cycle saving in the accumulation of wealth he purpose of this paper is to review what economists know at present about the following question how large a portion of the existing wealth is the result of a bequest motive that is of accumulation for the specific purpose of leaving bequests i will also endeavor to clarify why an answer to this question is of interest in the early keynesian period when the study of national saving first attracted wide interest relatively little attention was paid to what led people to save though it was generally understood that the main systematic reason was to leave bequests j m keynes in the famous chapter 9 of the general theory of employment interest and money 1936 had listed seven distinct motives for saving besides the leaving of bequests but five of these which include to increase one s future income or to insure one s independence and power implied that all or nearly all the accumulation would finally wind up as bequeathed wealth this in turn meant that most private wealth originated through bequests that is it either had been received through bequests or was destined to be bequeathed and indeed how else could society accumulate wealth however keynes 1936 p 107 also mentioned two further motives precaution that is to build up a reserve against unforeseen contingencies and foresight that is to provide for an anticipated future relation between the income and the needs of the individual or his family different from that which exists in the present as for example in relation to old age family education or the maintenance of dependents these motives in contrast to most of the previous ones have the

random earnings differences lifetime liquidity constraints and altruistic intergenerational transfers abstract this paper develops a model of private savings behavior in which households care about their descendants cannot have negative net worth and have lifetime earnings depending on random draws from an exogenous distribution of abilities the elements interact very lucky parents are likely to leave large estates constrained children are unusually likely to receive intergenerational transfers the paper proves the existence of a stationary cross sectional distribution of wealth endogenously determines where liquidity constraints will bind and shows that the long term interest rate must be such that ricardian neutrality fails its last section generates several illustrative numerical simulations

on the existence of an optimal capital structure theory and evidence one of the most contentious issues in the theory of finance during the past quarter century has been the theory of capital structure the geneses of this controversy were the seminal contributions by modigliani and miller 18 19 the general academic view by the mid 1970s although not a consensus was that the optimal capital structure involves balancing the tax advantage of debt against the present value of bankruptcy costs no sooner did this general view become prevalent in the profession than miller 16 presented a new challenge by showing that under certain conditions the tax advantage of debt financing at the firm level is exactly offset by the tax disadvantage of debt at the personal level since then there has developed a burgeoning theoretical literature attempting to reconcile miller s model with the balancing theory of optimal capital structure e g deangelo and masulis 5 kim 12 and modigliani 17 the general result of this work is that if there are significant leverage related costs such as bankruptcy costs agency costs of debt and loss of non debt tax shields and if the income from equity is untaxed then the marginal bondholder s tax rate will be less than the corporate rate and there will be a positive net tax advantage to corporate debt financing the firm s optimal capital structure will involve the trade off between the tax advantage of debt and various leverage related costs the upshot of these extensions of miller s model is the recognition that the existence of an optimal capital structure is essentially an empirical issue as to whether or not the various leverage related costs are economically significant enough to influence the costs of corporate borrowing the miller model and its theoretical extensions have inspired several timeseries studies which provide evidence on the existence of leverage related costs trczinka 28 reports that from examining differences in average yields between taxable corporate bonds and tax exempt municipal bonds one cannot reject the miller hypothesis that the marginal bondholder s tax rate is not different from the corporate tax rate however trczinka is careful to point out that this finding does not necessarily imply that there is no tax advantage of corporate debt if the personal tax rate on equity is positive indeed buser and hess 1 using a longer time series of data and more sophisticated econometric techniques estimate that the average effective personal tax rate on equity is statistically positive and is not of a trivial magnitude more importantly they document evidence that is consistent with the existence of significant leverage related costs in the economy

a reexamination of the empirical relationship between investment and financing decisions several studies see 7 15 9 and 16 have attempted to ascertain the empirical relationships that exist between the financing and investment decisions of firms the primary impetus for these efforts was provided by modigliani and miller mm 20 21 when they demonstrated that under the assumption of perfect capital markets the optimal investment decisions of a firm are separable from its financing decisions in the presence of market imperfections interdependencies between these decisions that violate the basic mm propositions may exist therefore the studies referred to above have essentially focused upon determining whether market imperfections have been of sufficient magnitude to lead to joint determination of investment and financing decisions though the original mm propositions were introduced more than two decades ago the nature of the empirical relationship between investment and financing decisions remains a controversial issue the fact that this matter is still unresolved is not attributable to a lack of attention for the original propositions have been examined in the presence of taxes bankruptcy costs and agency costs with no clear consensus emerging

ownership and firm innovation in a transition economy evidence from china we examine innovation performance of firms in a transition economy from an ownership perspective we focus specifically on the relationship between ownership structures and firm innovation performance drawing on data from 548 chinese firms we find volume of patent registration to be most strongly influenced by foreign ownership in the firm along with firm affiliation within a business group the influence of state and institutional ownership on innovation performance is positive but lagged contrary to expectations insider ownership leads to lower innovation performance and concentrated ownership has no significant impact our study has two principal contributions firstly we utilize a comprehensive treatment of ownership characteristics overcoming weakness in previous studies that have used a more narrow focus on ownership type secondly we contribute to understanding of how firms in transition economies build indigenous capabilities for innovation by drawing attention to the interplay of foreign and domestic control of agents innovation

intergenerational transfers and savings in recent years the role of intergenerational transfers in the process of wealth accumulation has been the subject of substantial empirical and theoretical analysis the key question stimulating this research is what is the main explanation for savings is it primarily accumulation for retirement as claimed by albert ando richard brumberg and franco modigliani in their celebrated life cycle model of savings is it primarily intentional accumulation for intergenerational transfers or is it primarily precautionary savings much of which may be bequeathed because of imperfections in annuity markets this paper examines a range of findings on the importance of intergenerational transfers the strong conclusion that emerges from this evidence is that intergenerational transfers play a very important if not a key role in aggregate wealth accumulation while intergenerational transfers figure very large in savings the precise motivation for such transfers is unclear intergenerational altruism might appear the most likely candidate but at least sane stylized facts such as the equal allocation of bequests among children are strongly at adds with the altruism model other explanations involving imperfect insurance arrangements or payments for child services do not appear capable of explaining the substantial amounts of transfers actually observed sorting cut the relative contributions of different models to intergenerational transfers and the precise role of intergenerational transfers in the process of wealth accumulation remains an intriguing and exciting enterprise this abstract was borrowed from another version of this item

taxes capital structure choices and equity value we use a multitude of tax reforms across the organisation for economic co operation and development oecd countries as natural experiments to estimate the market value of the tax benefits of debt financing we report time series evidence that tax reforms are followed by large changes in the value of corporate equity however the impact of tax reforms is greatly mitigated by the presence of leverage the value of debt tax savings is greater among top taxpayers among highly profitable firms and in countries where tax laws are more strongly enforced importantly the value of debt tax savings is in line with the benchmark implied by a traditional approach

optimal inflation with corporate taxation and financial constraints abstract how does inflation affect the investment decisions of financially constrained firms in the presence of corporate taxation inflation interacts with corporate taxation via the deductibility of i capital expenditures and ii interest payments on debt through the first channel inflation increases firms taxable profits and further distorts their investment decisions through the second expected inflation affects the effective real interest rate and stimulates investment when debt is collateralized the second effect dominates therefore present a tax advantage to debt financing positive long run inflation enhances welfare by mitigating or even eliminating the investment distortion

tax changes and phase diagrams for an overlapping generations model the literature evaluating tax changes within an intertemporal general equilibrium framework subdivides into representative agent and overlapping generations formulations papers in the former class have developed techniques analogous to those routine for static analyses i show that the same general approach works for the overlapping generations model the context is the system from auerbach and kotlikoff s dynamic fiscal policy the proposed methodology allows one to examine stability and determinancy issues for the model it deals precisely with small policy changes and it can easily handle bundles of changes i present comparative static results for comparison with existing work

asset markets with insider trading disclosure rule and reselling constraint an experimental analysis abstract we investigate the impact of compulsory insider trading disclosure and its combination with a mandatory holding rule on price predictability and asset mispricing we modify the dynamic price adjustment model to account for insiders private information our results show that insiders produce weakly characterized price signals that induce a less than proportional price adjustment to the changes in the dividend value in both markets with disclosure rule and holding requirement in comparison with unregulated markets a shift in insiders strategies from information motivated to liquidity motivated trading appears to fuel the impairment of price predictability in regulated markets the exacerbation of asset mispricing in markets with holding restriction is characterized by a growth in the speculative transactions and loss making trading proposals

banks firms and the relative pricing of tax exempt and taxable bonds abstract the traditional analysis of the relative pricing of tax exempt and taxable debt is a habitat theory of the term structure of interest rates in the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets recent work by fama 1977 suggests that banks are potential arbitrageurs across tax exempt and taxable bond markets which force a particular equilibrium on the pricing of short term bonds miller 1977 suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax exempt and taxable bonds this paper exploits the institution of regulation q and its effects on the banking system to bring evidence to bear on the predictions of these three models

miller s equilibrium shareholder leverage clienteles and optimal capital structure the purpose of this paper is twofold first we examine the individual portfolio decisions when income from stocks and bonds is taxed at different rates second a rationale for the existence of risky debt in the presence of leverage related costs and differential personal income taxation is provided previous studies on capital structure with differential personal income taxation have ignored either the portfolio risk consideration and or the possibility of losing personal and corporate interest tax shields due to insufficient taxable earnings e g 8 2 3 14 13 6 7 1 9 19 20 21 23 in section i of this paper both the portfolio risk consideration and the possibility of losing personal and corporate interest tax shields are explicitly introduced this enables us to provide a rationale for the shareholder leverage clientele phenomenon within a mean variance framework we also demonstrate a non corner solution for the optimal corporate capital structure in a tax environment similar to that of miller s debt and taxes 14 in sections ii and iii of this paper miller s world is further modified to include risky debt and the attendant costs we re examine and synthesize recent studies on the theory of optimal capital structure which have appeared since the publication of debt and taxes e g 4 6 7 13 19 20

the levered p e ratio a vast literature examines the role of debt in corporate valuation but most of these works proceed from the vantage point of corporate finance i e ascertaining the effects of adding debt to a previously unlevered company the investment analyst however confronts an already levered company with already levered return parameters the analyst s challenge is to estimate the stock s theoretical value by inferring the company s underlying structure of returns this shift in vantage point leads to results about the effect of leverage that are surprisingly different from the results of studies from the corporate finance angle whereas corporate finance studies find only a moderate effect of leverage when viewed from the analyst s perspective a company s value has such a high degree of sensitivity to the leverage ratio that it can significantly alter the theoretical p e valuation moreover from the analyst s vantage point leverage always moves the p e toward a lower value than that obtained from the sta

risk aversion imperfect competition and long lived information abstract this paper presents a methodology for characterizing the optimal dynamic behavior of risk averse strategic agents with private information by building on kyle econometrica 1985 53 1315 1335 it is shown that both monopolistic and competing informed traders choose to exploit rents rapidly causing market depth to be low in the initial periods and high in later periods and causing information to be revealed rapidly unlike in the case of a risk neutral monopolist considered by kyle

the bank capital decision a time series cross section analysis this paper seeks to explain the dramatic decline in capital to asset ratios in u s commercial banks during the last two decades it is hypothesized that the rise in nominal interest rates during this period might have contributed substantially to the fall in capital ratios time series cross section estimation supports the hypothesis regarding the interest rate bank capital is the sum of equity plus debt subordinated to deposits capital provides a cushion that protects the bank from insolvency when the value of its assets falls a bank can meet its obligations to depositors as long as losses on its asset portfolio do not exceed its capital the ratio of capital to total assets in u s commercial banks has fallen dramatically in the last two decades dropping from 11 7 percent in 1961 to 5 7 percent in 1978 the lowest level since world war ijj1 figure 1 shows the decline in the ratio of capital to noncash assets these figures suggest that the federal deposit insurance corporation fdic and uninsured depositors are being exposed to increased probabilities of losses from bank insolvencies however relatively little empirical research has been devoted to the determinants of the bank capital decision further the existing work see for example peltzman 24 mingo 20 or mayne 17 18 uses only cross sectional data and therefore does not necessarily explain the decline in capital to asset ratios over time previous empirical research has also focused on book values rather than market values of debt and equity although market values provide better estimates of the protection afforded by capital this practice might be partly justified by the attention paid to book values by bank regulators however the increasing use of qualitative factors as well as book ratios in capital regulation indicates that regulators are aware of the deficiencies in book values many of the so called qualitative considerations are precisely the factors that distinguish market from book value 6 pp 78 80 finally difficulties arise over the proper measure of capital the empirical studies cited above treat equity and debt capital symmetrically both equity and assistant professor of finance economics boston university school of management this paper was originally written as part of a doctoral dissertation at m i t helpful suggestions from robert mcdonald richard schmalensee larry summers and edward j kane are gratefully acknowledged l these statistics are based on the market values of capital and assets the methods used to construct the market value series are described in the appendix capital asset ratios based on book values also have fallen over the period in question although not as severely

bank income taxes and interest rate risk management a note banks and other financial institutions are concerned with the management of their interest rate risk in the frictionless markets of most finance theory however one interest rate risk management policy is just as good as another hence the finance literature does not provide convincing reasons for managers to want to control interest rate risk consequently the literature has provided little guidance on what to control how far to go with this control or on how to explain differences in interest rate risk exposure among banks given frictionless markets shareholder indifference to the bank s interest rate risk policy plus management s preference to reduce risk could lead to policies that reduce or eliminate exposure to interest rate risk i e to immunization strategies however if part of the reason for the existence of banks is the provision of maturity intermediation services managers who avoid exposure to interest rate risk are likely to come out second best to managers who choose asset and liability portfolios that do expose the bank s shareholders to this risk in this note we develop and analyze a model of bank decisions in which tax considerations induce banks to control interest rate risk in the u s banks have many opportunities to shield current income against federal and state taxation foreign tax credits investment tax credits and investment in tax exempt securities are three examples the tax position of a bank can be thought of as a stock of nonsaleable tax shields usable in the current or in future years the tax shields are an asset and if the bank s income falls below some level then the value of that asset will be reduced either by the loss of tax shielding opportunities or by the postponement of their realization 2 this note treats the bank tax position similarly to the models discussed by brennan and schwartz 2 miller 8 deangelo and masulis 4 and kim 6 however our interest is in the effect of tax shields on risk taking by financial institutions rather than a concern with capital structure decisions 3

the role of intergenerational transfers in aggregate capital accumulation this paper uses historical u s data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation the evidence presented indicates that intergenerational transfers account for the vast majority of aggregate u s capital formation only a negligible fraction of actual capital accumulation can be traced to life cycle or hump savings a major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age earnings and age consumption profiles these profiles are simply too flat to generate substantial life cycle savings this paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers life cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers

the value of the tax subsidy on risky debt the effect of corporate taxes on the market value of a levered firm continues to be a central issue in recent contributions in finance theory e g miller 1977 deangelo and masulis 1980 kim 1982 modigliani 1982 in these and other studies e g krause and litzenberger 1973 scott 1976 brennan and schwartz 1978 kim 1978 the relationship between market value and capital structure is established by formulating a tax subsidy function that specifies the partial effect of debt on the expected tax savings at the corporate level under the existing u s tax code a working assumption in most of these studies is that both principal and interest are tax deductible this assumption is made in the spirit of the original modigliani and miller 1963 formulation in which debt is taken to be perpetual and riskless indeed it is well known that the tax shield provided by the deduction of principal in a singleperiod framework has the same value as the tax shield from interest deductions in the case of perpetual and riskless debt under this assumption it is shown that in the absence of non debtthis paper examines the relationship between leverage and the value of the firm when non debt related tax shields are available and the corporate tax is levied as an income tax in a previous paper de angelo and masulis argue that in the presence of nondebt related tax shields the relationship between debt and firm value is concave resulting in an interior optimal capital structure when there is a tax induced differential in the cost of corporate debt their result derives from the fact that they assume the payment of debt principal and non debt related depreciation charges are deductible however the former deduction is consistent with a wealth tax while the latter is consistent only with an income tax we show that if the interest alone is deductible the debt firm value function is convex resulting in corner solutions to the capital structure problem the authors wish to thank richard castanias richard green lemma senbet and especially an anonymous referee for helpful comments and richard green and robert dammon for computational assistance

debt taxes and international equilibrium abstract this paper employs an extended miller model to analyze capital structure decisions of individual firms in a two country setting miller equilibria are generally not consistent with an international equilibrium if the tax subsidy of debt differs across countries the most obvious reason for differential tax subsidies is differences between national corporate tax rates we also identify differential tax subsidies of debt if inflation rates differ across countries for both cases we examine the adjustment process from national equilibria to an international equilibrium without and with barriers to international investment we derive the relationship between the equilibrium yields on debt and equity in the two countries and discuss the fisher hypothesis that real returns do not depend upon inflation in a two country miller world

on the share of inheritance in aggregate wealth europe and the usa 1900 2010 this paper provides historical series on the evolution of the share of inherited wealth in aggregate private wealth in europe france the uk germany sweden and the usa over the 1900 2010 period until 1910 the inheritance share was very high in europe 70 80 it then fell abruptly following the 1914 45 shocks down to about 30 40 during the 1950 80 period and is back to 50 60 and rising since around 2010 the us pattern also appears to be u shaped albeit less marked and with significant uncertainty regarding recent trends due to data limitations we discuss possible interpretations for these long run patterns

optimal capital structure and investment with real options and endogenous debt costs we examine the joint optimization of financial leverage and irreversible capacity investment in a real options framework with risky debt and endogenous interest costs higher capacity ceteris paribus increases operating leverage and default probability but lowers ex post adjustment costs and generates larger tax shields a key insight is that financial leverage and capacity are substitutes in the debt market equilibrium we develop novel predictions about the effects of capital adjustment costs operating costs and uncertainty on optimal financial leverage and capacity that may potentially help explain ambiguous empirical results in the literature regarding the determinants of capital structure and investment received march 17 2016 editorial decision july 8 2017 by editor itay goldstein

the puzzle of financial leverage clienteles empirically it appears that common stock of publicly traded corporations with high debt ratios tends to be held by investors with relatively low marginal taxes while the stock in companies with little debt is held by investors in high tax brackets a number of authors have argued that in an equilibrium similar to the one described by miller 8 these clienteles should exist we argue that standard portfolio theory does not imply financial leverage clienteles for publicly traded firms we explain the empirical relationship between investor tax rates and leverage ratios by the existence of dividend clienteles and a positive relationship between dividend yield and leverage ratios

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

corporation tax finance and the cost of capital this paper examines the influence of corporate tax exhaustion on the firm s financial and investment decisions a dynamic programming model is used to establish effective marginal tax rates in the presence of a tax system that permits the carry forward of losses to future periods the paper demonstrates that internal optimal financial structures may result which do not require the imposition of external constraints the cost of capital is highly sensitive to the current taxable earnings of the firm and the implications of this for such tax transfer activities as leasing are discussed

optimal capital structure and project financing abstract we examine the financing and incorporation modes for new projects there are two objectives the first is to provide a theory of optimal capital structure that links risk leverage and value and is particularly applicable to large firms counter to conventional wisdom we show riskier firms acquire more debt pay higher interest rates and have higher values in equilibrium second we provide an economic rationale for project financing which entails organizing a new project legally distinct from the firm s other assets we explain why project financing involves higher leverage than conventional financing and why highly risky assets are project financed

modelling companies debt and dividend decisions with company accounts data reliable empirical models of company financial decisions have proved hard to construct using aggregate data this paper uses company specific data drawn from the published accounts of a large sample of uk companies to estimate a model of debt and dividend decisions an attempt is made to assess the relative importance of costs of funds the tax system the balance sheet and profitability of the company and of statutory controls in determining these key financial decisions diversity of behaviour is analysed by allowing for unobserved company specific effects and by examining subsets of the full sample

the critical implicit tax rate and capital structure in a miller world firms are indifferent between debt and equity when the tax rate that isimplicitly used to price a bond is equal to the statutory corporate tax rate in this paper we derive the implicit tax rate that makes a firm marginally indifferent between debt and equity when debt related tax savings are uncertain we analyze the functional relationship between this critical tax rate and the amount of debt issued by a firm and discuss the implications for a firm s optimal capital structure

taxes capital structure and bondholder clienteles despite much recent progress financial theory has yet to explain the connection if any between the u s tax code and many observed characteristics of corporate bonds empirically why is there no single tax rate equating yields on corporate bonds with yields on tax exempt municipal bonds of apparently identical risks and maturities 2 specifically why does the spread in yields between corporate and municipal bonds divided by the yield on corporates a conventional measure of the marginal tax rate on corporates decrease with increasing risk and maturity more generally why are different types of bonds evidently held by clienteles of investors in tax clienteles for corporate bonds are identified in a competitive financial equilibrium under an asymmetric corporate income tax with interest preceding principal state contingent bonds with higher coupon yields are issued by firms with higher pretax cash inflows per dollar of nondebt tax shield purchased by investors in lower tax brackets and implicitly priced at lower marginal tax rates on these bonds all investors earn tax induced surpluses by contrast all other bonds have implicit tax rates typically equal to the corporate rate and yield for many investors no tax induced surpluses we gratefully acknowledge the helpful comments of george constantinides kose john merton miller jim scott marti subrahmanyam and participants in seminars at baruch chicago columbia houston michigan nyu rutgers usc washington wharton the american finance association the western finance association and the johnson symposium on taxes and finance at wisconsin george constantinides was especially helpful 1 the most notable contribution is miller 1977 other recent papers include chen and kim 1979 kim lewellen and mcconnell 1979 deangelo and masulis 1980a 1980b taggart 1980 kim 1982 auerbach and king 1983 and talmor haugen and bornea 1985 black 1971 anticipates an equilibrium with clienteles 2 schaefer 1982a identifies tax induced clienteles of bondholders in the british gilt market van horne 1982 reports that implicit tax rates vary over time as the supply of discount bonds changes additional evidence is cited in trczinka 1982

distribution of wealth and incomplete markets theory and empirical evidence abstract this paper analyses the equilibrium distribution of wealth in an economy where firms productivities are subject to idiosyncratic shocks returns on factors are determined in competitive markets households have linear consumption functions and government imposes taxes on capital and labour incomes and equally redistributes the collected resources to households the equilibrium distribution of wealth is explicitly calculated and its shape crucially depends on market incompleteness with incomplete markets it follows a paretian law in the top tail and the pareto exponent depends on the saving rate on the net return on capital on the growth rate of population and on portfolio diversification the characteristics of the labour market crucially affects the bottom tail but not the upper tail of the distribution of wealth in the case of completely decentralized labour market the analysis also suggests a positive relationship between growth and wealth inequality the theoretical predictions find a corroboration in the empirical evidence of united states in the period 1989 2004

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

parental altruism and inter vivos transfers theory and evidence this paper uses psid data on the extended family to test whether inter vivos transfers from parents to children are motivated by altruism specifically the paper tests whether an increase by one dollar in the income of parents actively making transfers to a child coupled with a one dollar reduction in that child s income results in the parents increasing their transfer to the child by one dollar this restriction on parental and child transfer income derivatives is derived for the standard altruism model augmented to include uncertainty and liquidity constraints these additional elements pin down the timing of inter vivos transfers the method used to estimate income transfer derivatives takes into account unobserved heterogeneity across families in the degree of altruism the findings strongly reject the altruism hypothesis redistributing one dollar from a recipient child to donor parents leads to less than a 13 cent increase in the parents transfer to the child far less than the one dollar increas

the capital structure puzzle revisited corporate finance researchers have long been puzzled by low corporate debt ratios given debt s corporate tax advantage this article recognizes that firm value typically reflects a growing stream of earnings while current debt reflects a nongrowing stream of interest payments debt to value is therefore a distorted measure of corporate tax shielding even with very small debt related costs this may explain the observed magnitude and cross sectional variation of debt ratios since this variation may be independent of tax shielding debt ratios provide an inappropriate framework for empirically examining the trade off theory of capital structure article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

mm past present future one of the most productive days in my life was the day in 1956 when it was agreed that merton miller then a shy and retiring young man would you believe it would sit in my graduate course in money and macroeconomics at carnegie institute of technology it was an exciting course with excellent students it took a broad view of the subject one issue that was covered was the cost of capital as a determinant of the rate of investment i had been intrigued by the subject ever since attending a national bureau conference on business finance at which i gave a fairly conventional paper modigliani and ziman 1952 but mostly i listened to a paper by david durand 1952 in which the possibility that financial structure would not affect the market valuation or the cost of capital was suggested only to be rejected as not relevant to the actual capital markets in preparing my lecture dealing with the cost of capital i was able to provide for a world of no taxes a sort of proof of proposition i based on arbitrage i reported the result to my class the next day adding that i didn t really believe my result and there probably was something wrong but miller was instantly captured by the result because he said he knew of a recent paper allen 1954 which provided empirical support for the result even though it lacked a convincing rationale we thus formed

the determinants of corporate capital structure japanese evidence this paper features a cross sectional regression analysis of the determinants of the company debt to value ratios of a sample of 125 japanese industrial and commercial companies for the period 1980 1983 inclusive the regression equations include a set of dummy variables designed to capture industry effects and a number of other variables acting as proxies for likely determinants of debt ratios suggested in the empirical literature such as profitability non debt tax shields risk etc the results are consistent with the existence of industry effects and suggest that paralleling recent american findings profitability is the most significant determinant of japanese company debt ratios

leverage and the value of a firm under a progressive personal income tax the relation between a firm s value and its leverage rate is investigated under a tax regime where interest is a tax deductible expense to firms where it is taxed at a progressive rate to persons and where share income is free of taxation the analysis is restricted to a one period economy with capital markets that are perfectly competitive apart from the above tax regime the equilibrium value of a firm is found to be a convex function of its leverage rate it is independent of the leverage rate only in the special case where the portfolio decisions of persons make all their marginal tax rates the same and equal to the corporate tax rate

the forbes 400 and the pareto wealth distribution abstract statistical regularities at the top end of the wealth distribution are examined using the forbes 400 lists during 1988 2003 we find that the wealth is distributed according to a pareto power law distribution with an average exponent of 1 49

interactions of the firm s real and financial decisions this paper provides an integrated approach to the theory of the firm under technological uncertainty corporate taxes risky debt and risk neutrality it is shown that the firm s investment production and financing decisions are made simultaneously it is demonstrated that the relationship between optimal capital or labour and debt is not strictly negative as in dotan and ravid 1982 nor strictly positive as in hite 1977 the direction of this relationship depends on the characteristics of debt and the characteristics of the firm s production function given the simultaneity of the real and financial decisions it is shown that an interior optimum exists for the firm s value as a function of debt

stockholder tax rates and firm attributes abstract this paper develops a rigorous theoretical model to assess when investor clienteles may be empirically identified using ex dividend day data and what firm attributes these clienteles should respond to it then presents empirical results for the period 1963 1977 suggesting that 1 tax based investor clienteles do exist and are reasonably stable over time and 2 these clienteles are strongly influenced by the dividend price ratio but insignificantly by direct measures of risk and other firm characteristics

inflation the interest rate and the required return on equity miller has analyzed capital structure in the presence of both corporate and personal taxes the present work investigates the effect of inflation on both interest rates and equity re turns when the miller equilibrium condition is employed in a loanable funds model both an interest rate effect and a redistribution effect are derived the interest rate effect forces the responsiveness of the interest rate to the inflation rate to be below that hypothesized by darby however the redistribution effect may change this responsiveness in either direc tion i introduction the number of academic studies concerning inflation has grown in tandem with the price level researchers have considered the effect of the rate of infla tion on the interest rate the simplest models show that without taxes a 1 per cent rise in the rate of anticipated inflation increases nominal interest rates by 1 percent recently the effect of taxation on the relationship between interest rates and inflation has been investigated for example darby 5 has pointed out that a 1 percent increase in the inflation rate should increase the after tax interest rate by 1 percent imply ing a greater movement in pre tax interest rate this result has been confirmed and extended by gandolfi 13 feldstein 8 and others however empirical evidence has not supported the theoretical work mentioned above beginning with irving fisher many researchers have found that a 1 percent increase in the inflation rate yields less than a 1 percent increase in the pre tax interest rate the results of feldstein eckstein 9 and fama 7 suggest a one to one relationship to our knowledge there is no convincing evidence of a greater than one to one relationship in addition to the lack of empirical validation there is at least one conceptual shortcoming in past studies of inflation and interest rates most theories of corporate capital structure are not suitable to macroeconomic models for university of pennsylvania philadelphia pa 19104 this paper has benefited from the com ments of m flannery g gerber r papetti a santomero and an anonymous jfqa referee

modeling marital connections among family lines this paper examines the role of marital connections in models of intertemporal household behavior recent work by bernheim and bagwell implies that such connections might vastly expand the scope of neutrality results the present work studies several formulations including not only marriage but also descriptions of how people choose spouses purposeful choices lead to assortative mating all versions of the framework tend to lead away from cross sectional neutrality results the analysis suggests that one may be able to derive a solution for a parthenogenetic model and then interpret it as consistent with nash equilibrium behavior in a world with marriage

capital structure investment and fire sales we study a dynamic general equilibrium model in which firms choose their investment level and capital structure trading off the tax advantages of debt against the risk of costly default bankruptcy costs are endogenous as bankrupt firms are forced to liquidate their assets resulting in a fire sale if the market is illiquid when the corporate income tax rate is positive firms have a unique optimal capital structure in equilibrium firms default with positive probability and their assets are liquidated at fire sale prices the equilibrium features underinvestment and is constrained inefficient in particular there is too little debt and default

intergenerational transfers and the accumulation of wealth h t ouseholds acquire wealth from two sources they save out of income they have earned and they receive transfers from other people the first method of wealth accumulation goes under the name of life cycle saving in which people save during their working lives and dissave after retirement the second involves either an inter vivos transfer that is a transfer between living people or a bequest a transfer that occurs at the death of the donor while inter vivos transfers and bequests will arise in dynastic models where preferences include a taste for the well being of one s descendents few empirical life cycle models reflect these concerns indeed a sharp debate has arisen over the ability of the simple life cycle model to explain observed wealth accumulation understanding the relative sizes of these sources of wealth accumulation affects a variety of issues for example the effects of government debt social insurance public transfer programs estate taxes and incentives for charitable giving depend to some extent on the magnitude and nature of private saving and transfers of wealth analyses of the inequality of wealth may depend on whether most of wealth is earned or received as transfers appropriate policies for encouraging private saving may look rather different depending on whether most saving is to be consumed later in life or passed along to the next generation finally evidence on transfer patterns relates to more fundamental

bequest motives a comparison of sweden and the united states this paper reviews four well known theoretical models of private bequest behavior notes their differing implications for public policy and discusses a way of empirically dis criminating among them then it implements the test with micro data from sweden lls and the u s psid the so called altruistic or dynastic model which among the four models has perhaps the most wide ranging implications for policy receives some support the sign pattern is as the model predicts while the magnitude is much smaller than the altruistic theory implies there is evidence of a potential complication due to a dependence of children s education on parents financial status in the case of the u s 2001 elsevier science b v all rights reserved

is the extended family altruistically linked direct tests using micro data this paper uses panel study of income dynamics data on parents and their adult children to test the standard altruism model this model predicts that within the extended family the distribution of consumption is independent of the distribution of resources the authors findings strongly reject this prediction copyright 1992 by american economic association

the modigliani miller leverage equation considered in a product market context we have proposed two additions to the theory of leverage optimization by firms operating in a competitively structured industry first whether the capital market is or is not subject to leverage related imperfections the force of entry will cause the long run relationship between profits and leverage to be given by the equation 17 0 even if it is possible in the short run for firms to add positive increments to profits by increasing beyond its current level competitive pressures will erode these increments completely second if the capital market is subject to leverage related imperfections firms will choose smaller leverage ratios than they would in the absence of these imperfections if in addition the industry is subject to the force of entry optimal leverage ratios will be even smaller put another way each firm s leverage ratio in the long run will reflect not just the impact of imperfections on capital costs but also the impact of entry on product price output and operating profits