Abstract
This paper shows how government financing decisions can influence the corporate decision to use debt or equity finance. In particular, it is shown that an increase in the stock of taxable government debt reduces the equilibrium quantity of corporate debt, and that an increase in the stock of tax-free government debt reduces the equilibrium quantity of corporate equity. The effects of inflation rate and tax rate changes are also considered.
Original language | English (US) |
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Pages (from-to) | 303-325 |
Number of pages | 23 |
Journal | Journal of Public Economics |
Volume | 22 |
Issue number | 3 |
DOIs | |
State | Published - Dec 1983 |
Funding
*I would like to thank Lawrence Summers for extremely helpful discussions. I am also grateful for comments from an anonymous referee, and from Fischer Black, Stanley Fischer, Alex Kane, Alan Marcus and participants in the B.U. finance seminar. Some of the results in this paper were obtained independently in Taggart (1982). This is based on a chapter in my M.I.T. Ph.D. dissertation. Research support from the National Science Foundation and the Federal Reserve Bank of Boston is gratefully acknowledged.
ASJC Scopus subject areas
- Finance
- Economics and Econometrics