Corporate Financial Policy, Taxes, and Uncertainty: An Integration

38 Pages Posted: 15 Feb 2001 Last revised: 6 Dec 2008

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)

Mervyn King

Bank of England; National Bureau of Economic Research (NBER)

Date Written: March 1979

Abstract

In this paper, we present a simple general equilibrium model of the portfolio behavior of households and institutions, paying particular attention to the influence of differences in tax rates and attitudes toward risk. Under the plausible assumptions that households are more risk averse than institutions and possess a greater relative "tax preference" for equity versus debt, we are able to characterize the equilibria which may result when debt is subject to bankruptcy risk. Among the issues which we study are the effects of tax rate changes, changes in risk, and changes in firm leverage on the relative asset holdings of the two types of investor and the rates of return earned on equity and debt. Numerical simulations provide additional understanding of the model's characteristics.

Suggested Citation

Auerbach, Alan Jeffrey and King, Mervyn A., Corporate Financial Policy, Taxes, and Uncertainty: An Integration (March 1979). NBER Working Paper No. w0324. Available at SSRN: https://ssrn.com/abstract=260502

Alan Jeffrey Auerbach (Contact Author)

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

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Mervyn A. King

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