Share Valuation and Corporate Equity Policy

15 Pages Posted: 2 Jul 2004 Last revised: 14 Sep 2010

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: 1980

Abstract

In recent years many contributions have appeared which examine the effects of corporate and personal taxation on firm financial policy. However, there has yet to appear an adequate explanation of why corporations continue to distribute dividends despite their disadvantageous tax treatment. We study this problem anew, in the context of an overlapping generations growth model with corporations financed by equity. Among our findings are: (1) capital owned by corporations may well be undervalued, even in the long run; (2) as a result of such undervaluation, firms may find it in the best interest of their stockholders to distribute dividends; and (3) an increase in the tax on distributions, while depressing the return to personal saving, may lead to an increase in the capital intensity of the economy. We also consider the criterion firms will use in evaluating new investment projects.

Suggested Citation

Auerbach, Alan Jeffrey, Share Valuation and Corporate Equity Policy (1980). NBER Working Paper No. w0255. Available at SSRN: https://ssrn.com/abstract=260446

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
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510-643-0711 (Phone)
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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Germany

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