Fiscal Policies and Asset Prices

Review of Financial Studies, 2012

47 Pages Posted: 15 Jun 2011 Last revised: 10 Mar 2017

Mariano Massimiliano Croce

University of North Carolina Kenan-Flagler Business School

Howard Kung

London Business School

Thien Tung Nguyen

Ohio State University (OSU) - Department of Finance

Lukas Schmid

Duke University - The Fuqua School of Business

Date Written: February 15, 2012

Abstract

The surge in public debt triggered by the financial crisis has raised uncertainty about future tax pressure and economic activity. We examine the asset pricing effects of fiscal policies in a production-based general equilibrium model in which taxation affects corporate decisions by: i) distorting profits and investment; ii) reducing the cost of debt through a tax shield; and iii) depressing productivity growth. In settings with recursive preferences, these three tax-based channels generate sizable risk premia making tax uncertainty a first order concern. We document further that corporate tax smoothing can substantially alter the effects of public expenditure shocks.

Keywords: cost of equity, corporate tax uncertainty, tax smoothing

JEL Classification: G12, E62

Suggested Citation

Croce, Mariano Massimiliano and Kung, Howard and Nguyen, Thien Tung and Schmid, Lukas, Fiscal Policies and Asset Prices (February 15, 2012). Review of Financial Studies, 2012. Available at SSRN: https://ssrn.com/abstract=1863956 or http://dx.doi.org/10.2139/ssrn.1863956

Mariano Massimiliano Croce (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Builiding
Chapel Hill, NC North Carolina 27599-3490
United States

HOME PAGE: http://dl.dropboxusercontent.com/u/17690403/mmc_site/public_html/index.htm

Howard Kung

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Thien Tung Nguyen

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Lukas Schmid

Duke University - The Fuqua School of Business ( email )

Durham, NC 27708-0120
United States

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