Taxes and Corporate Capital Structure in an Incomplete Market

Robert A. Taggart, Jr.

No 594, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper extends Merton Miller's 1977 analysis of corporate capital structure decisions to the incomplete capital markets case. As in Miller's model, aggregate demand for corporate leverage is curtailed as interest rates on taxable bonds rise. Unlike Miller's model, however, capital structure is not a matter of indifference to all equilibrium shareholders. Market incompleteness and tax arbitrage restrictions combine to prevent marginal rates of substitution from being equalized for all investors and hence their preferences are not unanimous. In addition, costs associated with debt induce a tendency for lower cost firms to issue a larger proportion of total corporate debt.

Date: 1980-12
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Taggart, Robert A. "Taxes and Corporate Capital Structure in an Incomplete Market." Journal of Finance, Vol. 35, No. 3, (June 1980), pp. 645-659.

Downloads: (external link)
http://www.nber.org/papers/w0594.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:0594

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w0594

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().