Working Paper: NBER ID: w0965
Authors: Robert L. McDonald
Abstract: This paper shows how government financing decisions can influence the corporate decision to use debt or equity finance. In particular, it is shown that an increase in the stock of taxable government debt reduces the equilibrium quantity of corporate debt, and that an increase in the stock of tax-free government debt reduces the equilibrium quantity of corporate equity. The effects of inflation rate and tax rate changes are also considered.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in taxable government debt (H63) | Reduction in corporate debt (G33) |
| Increase in tax-free government debt (H63) | Reduction in corporate equity (G32) |
| Changes in inflation rate (E31) | No effect on corporate debt-to-equity ratio (G32) |