Portfolio Choice and Corporate Financial Policy When There Are Tax-Intermediating Dealers
نویسنده
چکیده
Miller (1977) emphasized that optimal corporate financial policy depends on the tax rates facing the firm as well as the tax treatment accorded bondand stock-holders. In equilibrium, firms will issue claims that are held by the full spectrum of investors, from tax-exempt institutional investors to heavily taxed individuals. However, dealers are tax neutral institutions that can buy corporate securities and, under some circumstances, reissue them as a financial package with different tax characteristics. This activity potentially severs the link between the securities the firm issues and the securities investors hold. In a continuous-time setting with dealers, I show that investors generally will hold derivatives, and possibly stock, in lieu of holding taxable bonds. Moreover, the marginal tax advantage to debt in this setting is the corporate tax rate.
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