Working Paper: NBER ID: w0546
Authors: Alan J. Auerbach; Mervyn A. King
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.
Keywords: Taxation; Portfolio Choice; Debt-Equity Ratios; General Equilibrium
JEL Codes: H25; G11; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corporate tax rates (K34) | aggregate debtequity ratio (G32) |
| constraints on personal borrowing and short sales (G51) | stability of the debtequity ratio (G32) |
| constraints on personal borrowing and short sales (G51) | market equilibrium (D53) |