Corporate financial policy and taxation

Abstract

This thesis examines the role played by taxes on f i rm financing decisions in a general equilibrium uncertainty setting. The study isolates the conditions required for capital structure and dividend policy irrelevance to the value of the corporate firm. These conditions are relaxed to see how financial decisions are made. In the process there is a review of past theories of optimal capital structure choice, where most rely on leverage related costs. We present a model of optimal firm financial policy that does not rely on leverage related costs, but which is explained by incompleteness of securities markets . In the presence of taxes which discriminate between securities and investors, short-selling constraints will be required to rule out tax arbitrage. These constraints, which may arise endogenously, will limit the ability of investors to lever on personal account. Firm capital structure choice then becomes a substitute for personal leverage, where investor risk and tax preferences will matter to firm financial policy . In subsequent chapters this analysis is used to examine two issues . The first is to see how fully anticipated inflation rates affect t he financing decisions of firms, and the second is to consider the role of government ownership in firms, and in particular, the effects on shareholders (taxpayers) of privatisation (private equity sale s) in publicly owned firms. Show more