RFS Advance Access published online on August 11, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp062
Dynamic Investment and Financing under Personal Taxation
Swiss Finance Institute, Ecole Polytechnique Fédérale de Lausanne (EPFL), and CEPR
Swiss Finance Institute, University of Lausanne, and CEPR
Send correspondence to Norman Schürhoff, University of Lausanne, Faculty of Business and Economics, Extranef 239, CH-1015 Lausanne, Switzerland; telephone: +41 (21) 692-3447. E-mail: norman.schuerhoff{at}unil.ch.
JEL Classification: G31, G32, H24, H32
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Abstract |
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In this paper we examine the effects of capital gains taxation on firms' investment and financing decisions. We develop a real-options model in which the timing of investment, the decision to default, and the firm's capital structure are endogenously and jointly determined. Our analysis demonstrates that the asymmetric taxation of capital gains and losses fosters investment by eroding the option value of waiting. It also shows that firms controlled by taxable investors employ more equity financing, the higher the firm's stock price and the worse the firm's historical performance. Using a large sample of U.S. industrial firms that are owned by taxable investors between 1970 and 2008, we present new evidence on corporate investment and financing policies, which is supportive of the model's predictions.
We thank Pierre Collin-Dufresne, Julien Cujean, Darrell Duffie, Adlai Fisher, Richard Green, Dirk Hackbarth, Burton Hollifield, Susanne Schorsch, Chester Spatt, an anonymous referee, the editor (Matthew Spiegel), and audiences at a number of seminars and conferences for helpful comments. Financial support from the Swiss Finance Institute and from NCCR FINRISK of the Swiss National Science Foundation is also gratefully acknowledged.