Wealth Maximization and the Cost of Capital / Alan J. Auerbach.

By:

Auerbach, Alan J

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0254.Publication details: Cambridge, Mass. National Bureau of Economic Research 1980.Description: 1 online resource: illustrations (black and white)Online resources:

Available additional physical forms:

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Abstract: In this paper we explore the issue of wealth maximization and the implied behavior of the firm, paying particular attention to the results discussed above and how they are affected by the existence of capital income taxes. Our results indicate that a tax structure similar to that in existence in the United States influences the cost of capital in a very different way than has been assumed previously and that the relative advantages of debt over equity as a method of finance, and capital gains over dividends as a vehicle for personal realization of corporate profits, may have been greatly overstated. These findings may help to explain certain aspects of corporate financial behavior that have seemed puzzling.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w0254 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w0251 A Theory of the Natural Unemployment Rate and the Duration of Employment /	nber w0252 The Nature and Measurement of Unemployment /	nber w0253 Inflation and the Choice of Asset Life /	nber w0254 Wealth Maximization and the Cost of Capital /	nber w0255 Share Valuation and Corporate Equity Policy /	nber w0256 Children's Health and the Family /	nber w0257 The Lock-In Effect of the Capital Gains Tax: Some Time Series Evidence /	Next

April 1980.

In this paper we explore the issue of wealth maximization and the implied behavior of the firm, paying particular attention to the results discussed above and how they are affected by the existence of capital income taxes. Our results indicate that a tax structure similar to that in existence in the United States influences the cost of capital in a very different way than has been assumed previously and that the relative advantages of debt over equity as a method of finance, and capital gains over dividends as a vehicle for personal realization of corporate profits, may have been greatly overstated. These findings may help to explain certain aspects of corporate financial behavior that have seemed puzzling.