Miller’s Equilibrium and Uncertainty
This paper highlights the arbitrage activity by firms in Miller’s (1977) equilibrium when consumers face (short) selling constraints to restrict tax arbitrage. In this competitive equilibrium firms create risky taxpreferred securities that divide investors into strict tax clienteles; any changes in debt-equity ratios by individual firms have no real effects on consumers because other firms undo them. While DeAngelo and Masulis obtain this equilibrium with a full set of primitive bonds and a...[Show more]
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