The Equity Trap, the Cost of Capital and the Firm´s Growth Path

Tobias Lindhe and Jan Södersten ()
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Tobias Lindhe: Finansdepartementet, Postal: Skatte- och Tullavdelningen, 103 33 STOCKHOLM, Sweden

No 2006:19, Working Paper Series from Uppsala University, Department of Economics

Abstract: This paper reconsiders Sinn’s (1991) nucleus theory of the corporation by comparing two different regimes for the equity trap. In the first of these, all cash paid to the shareholders is taxed as dividends, in the second, shareholders are allowed a tax-free return of capital contributed through new issues. A substantial difference is found between the regimes in the seize of initial equity injections, although in both regimes, no dividends are paid until a new long-run equilibrium is reached. Contrary to Sinn, we find that with optimal behavior, the cost of new equity is lower than suggested by conventional formulae.

Keywords: dividend taxation; equity trap; cost of capital; nucleus theory; growth path (search for similar items in EconPapers)
JEL-codes: H24 H25 H32 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2006-09-05
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-fmk, nep-pbe and nep-pub
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Related works:
Working Paper: The Equity Trap, the Cost of Capital and the Firm’s Growth Path (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:uunewp:2006_019

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