Government Debt and Private Leverage: An Extension of the Miller Theorem

46 Pages Posted: 3 May 2004 Last revised: 22 Aug 2022

Date Written: August 1982

Abstract

This paper shows how government financing decisions can influence the corporate decision to use debt or equity finance. In particular, it is shown that an increase in the stock of taxable government debt reduces the equilibrium quantity of corporate debt, and that an increase in the stock of tax-free government debt reduces the equilibrium quantity of corporate equity. The effects of inflation rate and tax rate changes are also considered.

Suggested Citation

McDonald, Robert L., Government Debt and Private Leverage: An Extension of the Miller Theorem (August 1982). NBER Working Paper No. w0965, Available at SSRN: https://ssrn.com/abstract=302541

Robert L. McDonald (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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