NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Taxes, Firm Financial Policy and the Cost of Capital: An Empirical Analysis

Alan J. Auerbach

NBER Working Paper No. 955 (Also Reprint No. r0491)
Issued in August 1982
NBER Program(s):   PE

This paper develops a theoretical model of firm behavior consistent with the maximization of shareholder utility, and derives empirically testable implications of different theories of equity finance. Using data on firm earnings and previous investment and financial behavior, we assess whether firms treat new share issues as a more expensive source of finance than retentions, and whether such behavior varies across firms according to the composition of their shareholders. Our results strongly support the hypothesis that firms perceive a higher cost of capital when issuing new shares, and that the cost of capital varies significantly across firms having different estimated tax clienteles, as theory would predict.

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Document Object Identifier (DOI): 10.3386/w0955

Published: Auerbach, Alan J. "Taxes, Firm Financial Policy and the Cost of Capital: An Empirical Analysis." Journal of Public Economics, Vol. 23, No. 1/2, (February/March 1984), pp. 27-57.

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