Taxation and the Cost of Capital: The "Old" View, the "New" View and Another View
39 Pages Posted: 4 Jul 2004 Last revised: 28 Jul 2022
Date Written: October 1990
Abstract
This paper is a critical survey of the recent literature on the tax effects on corporate finance and investment decisions. It corrects a common misinterpretation of the "new" view, emphasizes the cushion effect of financial optimization, dismisses the view that optimizing firms behave as if they maximized their cost of finance, studies the role of immature firms, questions the alleged support of the old view by the occurrence of share repurchases, comments on a potential US budget compromise, and suggests the idea of a Political Miller Equilibrium.
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