Taxes and Corporate Capital Structure in an Incomplete Market

29 Pages Posted: 4 Jul 2004 Last revised: 18 Aug 2010

See all articles by Robert A. Taggart

Robert A. Taggart

Boston College - Carroll School of Management; National Bureau of Economic Research (NBER)

Date Written: December 1980

Abstract

This paper extends Merton Miller's 1977 analysis of corporate capital structure decisions to the incomplete capital markets case. As in Miller's model, aggregate demand for corporate leverage is curtailed as interest rates on taxable bonds rise. Unlike Miller's model, however, capital structure is not a matter of indifference to all equilibrium shareholders. Market incompleteness and tax arbitrage restrictions combine to prevent marginal rates of substitution from being equalized for all investors and hence their preferences are not unanimous. In addition, costs associated with debt induce a tendency for lower cost firms to issue a larger proportion of total corporate debt.

Suggested Citation

Taggart, Robert A., Taxes and Corporate Capital Structure in an Incomplete Market (December 1980). NBER Working Paper No. w0594. Available at SSRN: https://ssrn.com/abstract=227523

Robert A. Taggart (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Dept. of Finance
Chestnut Hill, MA 02467
United States
617-552-4113 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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