Taxes, Financing Decisions, and Firm Value
Center for Research in Security Prices (CRSP) Working Paper No.
34 Pages Posted: 1 Feb 1997
Date Written: May 1997
We use cross-section regressions to study how a firm's value is related to dividends and debt. With a good control for profitability, the regressions can measure how the taxation of dividends and debt affects firm value. Simple tax hypotheses say that value is negatively related to dividends and positively related to debt. We find the opposite. We infer that dividends and debt convey information about profitability (expected net cash flows) missed by a wide range of control variables. This information about profitability obscures any tax effects of financing decisions.
JEL Classification: G12, G14, G32
Suggested Citation: Suggested Citation