Tax Clienteles and the Miller Model with Incomplete Markets (Revision of 4-87)

Franklin Allen and Jeffrey Jaffe

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: There is some empirical evidence that high tax bracket investors hold the equity of unlevered firms while law tax bracket investors hold levered firms. It has been suggested that an extension of the Miller model can provide a theory which is consistent with this observation. However, it has been stated elsewhere that this separation arises only for some sequences of shareholder voting and trading. We show that clienteles exist irrespective of the sequence of events. However, the relationship between firm value and capital structure depends on whether a group with a tax rate equal to the corporate rate exists.

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