On the Consequences of Legal Constraints and Taxation for Corporate Choice

Carmen Carrera

Canadian Journal of Economics, 1991, vol. 24, issue 2, 471-85

Abstract: In this article, the author analyzes the effect taxation and legal constraints have on the definition of the firm's cost of capital and optimal financial policy under uncertainty. The assumes firms are competitive and considers only input choices spanned by the return vectors of existing securities. Under very specific tax conditions, these assumptions still guarantee a unique definition of the tax-adjusted cost of capital, but it is shown that, under more general tax structures, there is a split among potential shareholders accounted for by the ownership of the corporation.

Date: 1991
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