NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Share Valuation and Corporate Equity Policy

Alan J. Auerbach

NBER Working Paper No. 255 (Also Reprint No. r0030)
Issued in 1980
NBER Program(s):   PE

In recent years many contributions have appeared which examine the effects of corporate and personal taxation on firm financial policy. However, there has yet to appear an adequate explanation of why corporations continue to distribute dividends despite their disadvantageous tax treatment. We study this problem anew, in the context of an overlapping generations growth model with corporations financed by equity. Among our findings are: (1) capital owned by corporations may well be undervalued, even in the long run; (2) as a result of such undervaluation, firms may find it in the best interest of their stockholders to distribute dividends; and (3) an increase in the tax on distributions, while depressing the return to personal saving, may lead to an increase in the capital intensity of the economy. We also consider the criterion firms will use in evaluating new investment projects.

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Document Object Identifier (DOI): 10.3386/w0255

Published: Auerbach, Alan J. "Share Valuation and Corporate Equity Policy." Journal of Public Economics, Vol. II, (1979), pp. 291-305. citation courtesy of

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