Taxation and Corporation Finance

130 Pages Posted: 24 Jul 2001 Last revised: 31 Jul 2010

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Burton G. Malkiel

Princeton University - Bendheim Center for Finance; National Bureau of Economic Research (NBER)

Date Written: November 1980

Abstract

This paper analyzes the effects of the federal tax structure on corporate financial and investment behavior. We first develop a model of corporate behavior given taxes, taking into account both uncertainty and costs of bankruptcy. Simpler models abstracting from bankruptcy costs had clear counterfactual implications. The forecasts from our model proved to be consistent with both the observed cross-sectional variation in debt-equity ratios and the time series pattern of debt-equity ratios (data that were constructed in the paper). We then attempted to measure the efficiency costs created by corporate tax distortions as implied by the model. The forecasted efficiency cost of the distortion favoring debt finance seemed to be quite large, while the tax distortion affecting investment seemed to be less important than others have claimed. The paper concludes with a study of the efficiency implications of various proposed corporate tax changes.

Suggested Citation

Gordon, Roger H. and Malkiel, Burton G., Taxation and Corporation Finance (November 1980). NBER Working Paper No. w0576. Available at SSRN: https://ssrn.com/abstract=228980

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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Harvard University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Burton G. Malkiel

Princeton University - Bendheim Center for Finance ( email )

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609-258-0771 (Fax)

National Bureau of Economic Research (NBER)

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