 Corporate Income Taxation and SignalingNo 199713, Working Papers from University of Hawaii at Manoa, Department of Economics Abstract: A signalling model is developed to investigate the consequences of corporate income taxation in the presence of adverse selection in the equity market. The model obtains a unique, informationally-constrained efficient equilibrium in which a better quality firm retains more inside-equity, and, as in the complete information case, only profitable firms are supported. The corporate income tax affects signalling costs as well as the profitability of projects. Numerical experiments with exponential utility functions find that the inside-equity position of a better quality firm increases as the corporate income tax rate rises. This reaction is, however, insensitive to the tax rate change due to the risk-sharing with the government, which leads to the interesting result that the corporate income tax only incurs a lower welfare cost than the lump sum tax with the same tax revenue. Keywords: corporate income taxation; excess burden; signalling (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hai:wpaper:199713 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in Working Papers from University of Hawaii at Manoa, Department of Economics Contact information at EDIRC. |
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