The Theory of Recapitalizations and the Evidence of Dual Purpose Funds

Litzenberger, Robert H.; Sosin, Howard B.

doi:10.1111/j.1540-6261.1977.tb03346.x

Cited by 27 publications

(18 citation statements)

References 15 publications

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“…From the first order conditions it follows that in individual portfolio equilibrium:

m_{I s t}^{k} = [\frac{\partial E_{k} [U_{k} (\cdot)]}{\partial Y_{I s t}^{k}}] {[\frac{\partial E_{k} [U_{k} (\cdot)]}{\partial C_{0}^{k}}]}^{- 1} = ϕ_{I s t} \forall s \forall t

and

m_{w s t}^{k} = [\frac{\partial E_{k} [U_{k} (\cdot)]}{\partial Y_{w s t}^{k}} - \partial_{w s t}^{k}] {[\frac{\partial E_{k} [U_{k} (\cdot)]}{\partial C_{0}^{k}}]}^{- 1} = ϕ_{w s t} \forall s \forall t

In market equilibrium, the above conditions, the individuals's budget constraint and conservation relationships would have to be satisfied. For a similar development of market equilibrium see Litzenberger and Sosin [12]…”

mentioning

confidence: 95%

Elimination of the Double Taxation of Dividends and Corporate Financial Policy

Litzenberger¹,

Horne²

1978

The Journal of Finance

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IN RECENT YEARS, there has been a great deal of discussion about eliminating the double taxation of dividends. Tax reform proposals for eliminating double taxation were proposed by the Ford administration and currently are being proposed by the Carter administration. With the present tax system, the investor pays personal income taxes on cash dividends distributed to him and, in addition, his portion of the total earnings of the company is subject to the corporate tax rate. Thus, unlike other sources of income, corporate source income is taxed under two different income taxes-personal and corporate.Many economists propose the integration of corporate and personal income taxes. Full integration would eliminate the corporate income tax altogether with all corporate earnings being taxed at the stockholder level. As a result, a company's earnings, whether retained or distributed, would be taxable to the stockholder on the basis of his proportional ownership of the company. This would occur in the same way that the income of a partnership is taxed to the partners. While a number of economists advocate full integration,' there are many political and practical obstacles which thwart such a radical change.2 Consequently, most of the recent debate has focused on the partial integration of corporate and personal income taxes, one form of which is the elimination of the double taxation of dividends. In some measure, this debate is kept alive by the conspicuousness of the United States in being one of the few advanced industrial countries of the world without some form of partial integration.3 This paper will concentrate on the partial as opposed to the full integration of corporate and personal income taxes. In turn, there are several mechanisms for eliminating the double taxation of dividends. These include deduction of dividends at the corporate level, the stockholder credit method, or some combination of the two.Under the dividend deduction method, the corporation is allowed a tax deduction for dividends in the same way that it is allowed an interest deduction for its debt. Thus, the tax saving is received by the corporation and stockholders continue to * Graduate School of Business, Stanford University. This study was supported by the Stanford Program in Finance, the major contributors to which are the BankAmerica Foundation, General Electric Company, Dean Witter Foundation, Morgan Guaranty Trust Company, Morgan Stanley & Co., and Salomon Brothers. We are grateful to Myron Scholes, James Scott, Howard Sosin, and Mark Wolfson for helpful comments. 1. See, for example, Hollard [10]; McClure [13]; and Feldstein and Frisch [6]. 2. In the mid-1960's, the Carter Commission proposed such a change for Canada and this kindled considerable interest in full integration. However, the proposal was not adopted and has not been adopted in any other country. For an analysis of the Carter Commission plan as it would apply to the United States, see Break [3]. 3. For an excellent review of the integration of corporate and personal taxes i...

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“…From the first order conditions it follows that in individual portfolio equilibrium:

m_{I s t}^{k} = [\frac{\partial E_{k} [U_{k} (\cdot)]}{\partial Y_{I s t}^{k}}] {[\frac{\partial E_{k} [U_{k} (\cdot)]}{\partial C_{0}^{k}}]}^{- 1} = ϕ_{I s t} \forall s \forall t

and

m_{w s t}^{k} = [\frac{\partial E_{k} [U_{k} (\cdot)]}{\partial Y_{w s t}^{k}} - \partial_{w s t}^{k}] {[\frac{\partial E_{k} [U_{k} (\cdot)]}{\partial C_{0}^{k}}]}^{- 1} = ϕ_{w s t} \forall s \forall t

mentioning

confidence: 95%

Elimination of the Double Taxation of Dividends and Corporate Financial Policy

Litzenberger¹,

Horne²

1978

The Journal of Finance

Self Cite

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“…In general, of course, share trading could also be subject to transaction costs,and this could cause divergences in share valuations in much the same fashion that short-selling restrictions cause such divergences in Litzenberger and Sosin (1977). We have chosen, however, to isolate market incompleteness in the bond market so as to highlight its effects.…”

Section: Discussionmentioning

confidence: 99%

“…B. Williams (1938), Durand (1959), Litzenberger and Sosin (1977), Sosin (1978), Litzenberger (1980 and Satterthwaite (1980), have previously alluded to the role of corporate securities in enhancing market completeness. However, the equilibrium implications of this role for corporate finance have not been fully pursued.…”

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confidence: 99%

Capital Structure Equilibrium under Incomplete Market Conditions

Senbet¹,

Taggart²

1981

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“…We are by no means the first to suggest that one role for corporate finance lies in completing the market. A number of authors, including Williams [31], Durand [10], Litzenberger and Sosin [18], Sosin [27], and Litzenberger [17] have previously alluded to this idea. However, the equilibrium implications of this role for corporate finance have not been fully pursued.…”

mentioning

confidence: 99%

“…44In general, of course, share trading could also be subject to transaction costs and this could cause divergences in investors' share valuations in much the same fashion that short‐selling restrictions cause such divergences in Litzenberger and Sosin [18]. We have chosen to focus on the bond market.…”

mentioning

confidence: 99%

Capital Structure Equilibrium under Market Imperfections and Incompleteness

Senbet¹,

Taggart

1984

The Journal of Finance

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This paper generalizes Miller's supply‐side equilibrium argument to other forms of capital market imperfections and incompleteness. If corporations possess a comparative advantage in dealing with these imperfections, they have an incentive to act as financial intermediaries. Corporations' attempts to profit from these intermediation activities dictate an optimal capital structure for the corporate sector as a whole, but in equilibrium the capital structure of any single firm is a matter of indifference. In addition, the positive role that corporate finance plays in completing the market restores standard perfect market results on asset pricing and the associated portfolio separation properties.

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The Theory of Recapitalizations and the Evidence of Dual Purpose Funds

Cited by 27 publications

References 15 publications

Elimination of the Double Taxation of Dividends and Corporate Financial Policy

Elimination of the Double Taxation of Dividends and Corporate Financial Policy

Capital Structure Equilibrium under Incomplete Market Conditions

Capital Structure Equilibrium under Market Imperfections and Incompleteness

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