Corporate Financial Policy, Taxes, and Uncertainty: An Integration

Alan Auerbach and Mervyn A. King

No 324, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we present a simple general equilibrium model of the portfolio behavior of households and institutions, paying particular attention to the influence of differences in tax rates and attitudes toward risk. Under the plausible assumptions that households are more risk averse than institutions and possess a greater relative "tax preference" for equity versus debt, we are able to characterize the equilibria which may result when debt is subject to bankruptcy risk. Among the issues which we study are the effects of tax rate changes, changes in risk, and changes in firm leverage on the relative asset holdings of the two types of investor and the rates of return earned on equity and debt. Numerical simulations provide additional understanding of the model's characteristics.

Date: 1979-03
Note: PE
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Published as Auerbach, Alan J. and King, Mervyn. "Corporate Financial Policy with Personal and Institutional Investors." Journal of Public Economics, Vol. 17, No. 3 (April 1982), pp. 259-285.

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