Asset Pricing with Taxes: A Security Market Model Considering Demand Aggregation

Posted: 23 Jul 2004

See all articles by Marc Steffen Rapp

Marc Steffen Rapp

University of Marburg - School of Business & Economics; University of Marburg - Marburg Centre for Institutional Economics (MACIE)

Date Written: July 31, 2004

Abstract

With respect to valuation there are two effects of taxation. On the one hand taxation directly affects the cash flows of an investment distributed to investors. On the other hand it indirectly affects the equilibrium pricing mechanism of the economy. Applying the consumption based asset pricing framework in a two-date security market model with heterogeneous agents we analyze the second effect. Establishing a tax authority with revenues (security income and consumption taxes) and expenditures (redistribution) enables the government to alter the wealth distribution of the economy. Allowing for frictions in this re-allocation process we discuss the implications for the equilibrium pricing mechanism. Introducing the concept of weak and strong invariance we present two invariance statements, one for economies with homogeneous agents and a second for economies satisfying the aggregation property. As an application we discuss two problems of coporate valuation. Especially we revisit the neutrality result of Samuelson (1964).

Keywords: Asset pricing, taxation, valuation, equilibrium

JEL Classification: D31, D51, G12, H24

Suggested Citation

Rapp, Marc Steffen, Asset Pricing with Taxes: A Security Market Model Considering Demand Aggregation (July 31, 2004). Available at SSRN: https://ssrn.com/abstract=567662

Marc Steffen Rapp (Contact Author)

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

University of Marburg - Marburg Centre for Institutional Economics (MACIE) ( email )

Am Plan
Marburg, 35032
Germany

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