Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model

Alan Auerbach and Mervyn A. King

No 546, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper explores the portfolio behavior of investors differing with respect to both tax rates and risk-aversion, emphasizing the role of constraints on individual and firm behavior in ensuring the existence of and characterizing portfolio equilibrium. Under certain conditions on the securities available in the market, which also are required for shareholders to be unanimous in supporting firm value maximization, investors will be segmented by tax rate into two groups, one specialized in equity and the other in debt. Though the relative wealths of the two groups determines the aggregate debt-equity ratio, each firm will be indifferent to its financial policy.

Date: 1980-08
Note: PE
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Published as Auerbach, Alan J. and King, Mervyn A. "Taxation, Portfolio Choice and Debt- Equity Ratios: A General Equilibrium Model." Quarterly Journal of Economics , (November 1983): 588-609.

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Journal Article: Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model (1983)
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