Debt, Equity, and Taxes

Transcription

1 De, Equiy, ad Taxes By Dee Kesley * Coluia Uivesiy ad Yale Uivesiy ad Michael G Willias ** Uivesiy of Califoia, Los Aeles Jauay 0, 2002 We expess appeciaio fo isihful coes fo Aoio Beado, David Badfod, Roe Godo, Lay Glose, Rick Gee, Gle Huad, Jack Huhes, Michael Kischeheie, Sephe Pea, ad wokshop paicipas a he Coluia Uivesiy Buo Cofeece ad he Yale School of Maaee Faculy Wokshop Pofesso Kesley also expesses appeciaio fo fiacial suppo fo he Coluia Busiess School Reseach Poa i Tax * Coespodece Auho: Yale School of Maaee, 35 Pospec See, PO Box , New Have, CT , deekesley@yaleedu, ( , fax: ( ** Uivesiy of Califoia a Los Aeles, Adeso Gaduae School of Maaee, Box 9548, Los Aeles, CA , ( , ichaelwillias@adesouclaedu

2 De, Equiy, ad Taxes Asac I his sudy, we exed Mille s 977 capial sucue aalysis y addi poeially hih pesoal axes o divideds ad shae epuchases, ad y focusi o aue fis wih a leas soe pe-exisi equiy We deosae ha pesoal axes o equiy disiuios push ew equiy fiaci o a ifeio coe, u hey do o push ieal equiy (ie, eivesed fee cash flows o a coe Theefoe a ieio capial sucue soluio eais, i which fis ae idiffee ewee usi de ad ieal equiy fiaci, while pefei o avoid issui addiioal exeal equiy Ieesily, ay aiues of Mille s odel suvive hih pesoal axes o equiy disiuios, icludi he aeae de-equiy aio, he ideiy of he aial ivese clieele, ad ivesos pofolio allocaios ewee de ad equiy secuiies Neveheless, ay uique isihs also aise

3 De, Equiy, ad Taxes I 977, Mille laid ou a asic paadi of de ad axes ha coiues o fae uch of he capial sucue deae oday Mille eas he capial sucue decisio as a siple choice ewee issui de vesus exeal equiy o fiace ivese If he fi issues de, he fi pays ou ax-deducile iees o odholdes, avoidi he copoae ax u sujeci ivesos o heavy pesoal axes If he fi issues equiy, he fi uses o-deducile divideds o shae epuchases o disiue pofis, icui he copoae ax u oly sujeci ivesos o pesoal divided o capial ais axes Mille assues away uch of hese pesoal axes o divideds ad capial ais, aui fis ca defe axale equiy disiuios idefiiely ad/o hee is a vey low ax ae o disiuios As a esul, he aial ivese clieele faces uch hihe pesoal axes o de ha o equiy, which offses he copoae ax advaae of de A ieio capial sucue equiliiu esuls, i which fis ad he aial iveso ae idiffee ewee de ad equiy fiaci I pacice, axale disiuios o shaeholdes ae coo Faa ad Fech (200 docue ha he pece of divided-payi fis has declied susaially ove ie, fo 528 pece i 973 o 208 pece i 999 Neveheless, aeae divideds (oss shae epuchases as a pece of aeae eais acually iceased fo 340 pece (34 pece i o 393 pece (355 pece i I addiio, he aou of axale divideds epoed o idividual icoe ax eus iceased fo $388 illio i 980 o $325 illio i 999, ad he aou of The icease i aeae divideds fo o peiod is o oooic Specifically, he aeae divided peceae eached a peak of 569 pece i efoe doppi ack o 393 pece i

4 axale e capial ais fo all souces (icludi shae epuchases iceased fo $327 illio i 980 o $5526 illio i 999 (IRS Saisics of Icoe By laely assui away divided ad capial ais axes o disiuios, heefoe, Mille appeas o udesae he pesoal ax o equiy (Gee ad Hollifield, 200 I his sudy, we exed Mille s aalysis y addi poeially hih pesoal disiuio axes I addiio, we focus o aue fis wih a leas soe pe-exisi equiy To ale pe-exisi capial sucue, aue fis ca o oly issue ew equiy ad pay off de, u hey also ca issue de ad disiue cash o shaeholdes via divideds o shae epuchases, which ie iediae ax coss Mille iplicily asacs fo his secod capial sucue echais y esseially odeli fis as sa-ups choosi capial sucues fo scach, wih o iediae ax cosequeces I he special case of zeo pesoal axes o equiy disiuios, we fid shaeholdes ae idiffee eadi he fi s use of de vesus exeal equiy (ie, ew equiy issues, cosise wih Mille s odel Also as coeplaed y Mille, iceasi equiy disiuio axes pushes exeal equiy fiaci o a ifeio coe I coas o Mille s aalysis, howeve, hih pesoal axes o equiy disiuios do o esul i a all-de fiaci soluio, a leas fo aue fis A ieal capial sucue soluio eais iac ecause shaeholdes eai idiffee eadi he fi s use of de vesus ieal equiy Tha is, shaeholdes eai idiffee eadi he fi s choice o eihe (a disiue fee cash flows ad icease de, o ( eai fee cash flows ad decease de 2 Give his idiffeece ewee de ad 2 This popey of ou odel is cosise wih he evidece i Faa ad Fech (2002 ha vaiaio i ivese ad eais, which deeies fee cash flows, is osly asoed y de 2

5 ieal equiy, ay aiues of Mille s equiliiu suvive hih pesoal axes o equiy disiuios Fo exaple Mille s aeae de-equiy aio, he ideiy of he aial ivese clieele, ad ivesos pofolio allocaios ewee de ad equiy secuiies all eai iac Ou ieio capial sucue equiliiu is ous o disiuio axes ecause ivesos ea he disiuio ax o ieal equiy as a suk cos I ou odel, fis us eveually disiue eais, ad i equiliiu, he pese value ax cos is he sae wheeve disiuios occu Give he suk-cos aue of he disiuio ax, ou equiliiu is feasile whehe fis use hih-ax divideds, low-ax shae epuchases, o ay coiaio of he wo ehods o disiue equiy Despie he siilaiies ewee ou odel ad Mille s odel, addi equiy disiuio axes yields a vaiey of uique isihs Fis, Mille s aalysis iplies fis should e idiffee ewee de ad exeal equiy fiaci, wheeas i pacice, de laely doiaes exeal equiy fiaci Cosise wih oseved pacice, ou odel iplies aue fis should pefe oh de ad ieal equiy fiaci elaive o exeal equiy fiaci wheeve he pesoal ax ae o equiy disiuios is posiive 3 Secod, ou odel iplies hee is a poeially lae ax wede ewee he coss of usi ieal ad exeal equiy capial, which should affec capial udei decisios ad weihed aveae cos of capial (WACC calculaios Cue exook discussios ofe ioe his ax wede Thid, ou odel iplies ha 3 Of couse, ifoaio asyey ewee aaes ad ivesos ay coiue o he oseved pefeece fo ieal vesus exeal equiy fiaci (see Myes ad Majluf, 984, Myes, 984, u ou odel iplies axes could play a ipoa, peviously ioed ole i oseved fiaci pecki odes 3

6 i equiliiu, he ii of copoae disiuios is ieleva Theefoe fis ca disiue equiy whe desied wihou coce of iposi iceeal axes o shaeholdes, esseially ecause he disiuio ax is a suk cos 4 Aohe uique iplicaio of ou odel is ha exchai de fo ieal equiy y issui de ad disiui eais iceases fi value Howeve, he exchae does o ehace shaeholde wealh ecause i ies a iediae disiuio ax ha shaeholdes ecoize o hei ow accous, which pefecly offses he icease i fi value Hece axiizi fi value is o equivale o axiizi shaeholde wealh This iplies ha ake evidece of a lae de-ax shield (see, e, Kesley ad Nissi, 200 does o ecessaily iply low-de fis leave shaeholde oey o he ale The pape poceeds as follows I Secio we specify ou assupios ad defiiios I Secio 2 we deive equiliiu disiuio ad capial sucue policy i a ecooy wih a sile ivese clieele I Secio 3 we exed ou odel o a eeal equiliiu sei wih uliple clieeles ad ax aes I Secio 4 we descie he popeies ad iplicaios of he odel We coclude i Secio 5 Assupios ad Defiiios Mille s Basic Assupios Ou ojecive is o isolae he effecs of addi equiy disiuio axes o Mille s odel, while focusi o aue fis Theefoe we ei y adopi five of 4 This esul is vey diffee fo he esul i DeAelo ad Masulis 980a, Secio 5, i which axale equiy disiuios disappea eiely, laely ecause we focus o aue fis wih pe-exisi capial sucues (see Secio 3 fo deails 4

7 Mille s asic assupios Fis, we assue fis have uliied access o he de ake o eihe uy o sell ods Secod, we assue all aes face cosa, liea ax aes Howeve, we allow fo coss-ae vaiaio i ax aes (e, ax-exeps vs idividuals Thid we assue zeo fiacial disess coss fo de ad assue hee is o ifoaio asyey We se hese poeially ipoa oax facos aside fo fuue eseach Fouh, we assue sho sales (oowi y ivesos ae liied Wihou loss of eealiy, we assue he lii is zeo, u ay fiie lii is sufficie fo ou odel Fifh, we assue aes ae isk-eual, odeli cash flows as ceai Howeve, his isk-eualiy assupio ay o e as esicive as i appeas Whe aalyzi he effec of axes o fiacial ake equiliiu, Willias (200 specifies easoale codiios ude which hese cash flows ca e eaded as he ceaiy equivales of he acual isky flows 5 2 The Tax Evioe We ow descie he ax evioe The copoae ax ae (τ is cosa fo all fis Each iveso faces ax aes o odiay icoe ( ad capial ais ( is he accual-equivale capial-ais ax ae, ad > 6 Divideds ad iees ae sujec o ax a ae I addiio hee is a coied ax ae o copoae cash 5 I paicula, Willias (200 deosaes ha ude elaively ild assupios, which ae e y he assupios of ou odel plus he iclusio of a se of fuues coacs ha spas he isk facos i fi cash flows, he equivale aiale easue fo valui isky cash flows is idepede of he ax syse ad cosa acoss diffeely axed cash flows 6 Capial ais axes ae oly levied upo sale of asses, so defei capial ais deceases he pese value of he ax The accual-equivale capial ais ax ae accous fo his defeal eefi 5

8 disiuios o shaeholdes (d, which eflecs expecaios eadi he ix of divideds ad shae epuchases Caefully defii d is o ivial ecause a disiuio has wo ax effecs Fis, disiuios ie a diec ax cos fo shaeholdes he odiay icoe ax o divideds ad he capial ais ax o shae epuchases Gee ad Hollifield (200 deosae he oveall ax cos of epuchases is aeial I ou odel, howeve, he disiuio ax ude of a epuchase is liied o he acceleaio of ais ha edei shaeholdes would ohewise ecoize a a lae poi i ie (e, houh liquidiy-oivaed ades Thus, he ax cos of a epuchase is siply he los ie value fo capial ais ax defeal Secod, disiuios ofe ale sock pices, which ca esul i a capial ai o loss This chae i sock pices is elaed o he failia ex-divided effec (see, e, Elo ad Gue, 970, u is o esiced o divideds We allow fo he possiiliy ha shae epuchases also affec sock pices I ou odel, his ex-disiuio sock pice effec is deeied edoeously Pio o deivi he equiliiu, heefoe, we us defie d as a fucio of he chae i sock pice To do so, we fis defie γ as he declie i he ake value of a fi upo disiuio of $ fo he fi We he defie d i es of γ as follows: ( γ ( γ ; 0 d = d To udesad, coside he exee cases i which = ad = 0 If a fi uses divideds exclusively, =, ad siplifies o d = - γ This eflecs he diec ax o he divided offse y he capial ais ax eefi fo a educio i shae pices A he ohe exee if a fi uses shae epuchases exclusively, ad if we ake he 6

9 exee assupio ha hee is o diec ax o shae epuchases, = 0, ad siplifies o d = -γ Noe ha i his case, hee is o disiuio ax if he declie i he ake value of he fi equals he aiude of he epuchase ecause γ would equal uiy ad d would equal 0 This is as i should e, ecause shae epuchases educe he ue of shaes ousadi, so if ake value falls y he aou of he epuchase, he ake value ad he ue of shaes ousadi would fall popoioaely, sock pice would eai cosa, ad hee would e o disiuio ax Mille 977 esseially assues ad d ae sall, wheeas we eealize Mille s odel y allowi fo posiive, poeially hih values fo ad d We elieve his is a ipoa eealizaio ecause ad d ae likely o e posiive eve if a fi solely uses ax-favoed shae epuchases o disiue equiy The use of divideds iceases d fuhe Alhouh he use of divideds i lieu of shae epuchases iceases ad d, we asac fo he deeias of he choice ewee he wo disiuio ehods ad allow fo ay ix I pacice we oseve oh ypes of disiuios, ad pio eseach has o fully esolved why fis choose oe ehod o he ohe Alhouh shae epuchases ae ax-advaaed elaive o divideds, Chowdhy ad Nada 994 deosae ha ude ceai codiios he pice ipac of shae epuchases could discouae hei use Hausch ad Sewad 993 deosae ha ude ceai codiios he siali aiues of divideds ae oe effecive ha he siali aiues of shae epuchases Jaaaha e al (2000 ad Guay ad Hafod (2000 povide evidece ha fis wih sale, peae eais ed o use divideds, 7

10 wheeas fis wih asioy shocks o eais ed o use shae epuchases Hece ay facos could affec he choice ewee divideds ad shae epuchases, so i his sudy, we siply allow fo oh Rahe ha focus o he choice of disiuio ehod, we focus o he ii of copoae disiuios 3 Copoae Aciviies We ow coside he ivese ad fiacial policy aciviies of he fi We assue fi has opeai eais efoe iees ad axes of X (i ad opeai asses of O (i fo fuue peiod i The fi opiizes value y ivesi i all availale posiive NPV opeai pojecs ased o a discou ae equal o he afe-ax oowi ae of Theefoe, opeai asses (O should vay ove ie accodi o vaiaio i he se of availale posiive NPV pojecs The peax ae of eu o ods is, ad as peviously assued, he copoae icoe ax ae is τ Theefoe = -τ 7 De is availale o he fi i ifiie supply, so he aial cos of de is a cosa uaffeced y fiacial policy choice Tha is, he ivese ad fiacial policy decisios of he fi ae sepaale The oly esicios we ipose o he sequeces of opeai icoe ad asses ae: 7 Aleaively, we could odel he equied afe-ax eu o ivesos as a exoeous cosa ad deive he peax iees ae edoeously Beyod oaioal diffeeces, his aleaive would o affec ou odel ecause we ae o ieesed i deivi copaaive saics of how equiliiu chaes if he ax eie chaes (ie, we ea ax aes as exoeous cosas 8

11 O ( i > 0 i, X ( i > O ( i i, ad O( i li < i O ( i (A The fis codiio equies he fi o aiai posiive opeai asses a all ies The secod codiio is ha he fi us eeae a aveae eu o ivese i excess of he discou ae, which follows fo ou ealie assupio ha he fi oly chooses posiive NPV opeai pojecs The hid codiio esues he fi does o ow fase ha he discou ae Wihou his codiio, he fi would have ifiie value (ive he secod codiio I addiio o opeai asses, he fi also has a sequece of e fiacial asses ove ie, F (i, which eeaes a afe-ax eu of A eaive value fo F (i epeses he de level of he fi The fi also chooses a sequece of disiuios, D (i, o pay o is shaeholdes The ie pah of fiacial asses is sujec o he followi fiaci cosai: [ O ( i O ( i ] D ( F ( i = F ( i X ( i τ i (2 This cosai eflecs asic accoui ideiies I paicula, fiacial asses i peiod i equal ies fiacial asses i peiod i-, plus afe-ax opeai eais, less e ew ivese i opeai asses, ad less disiuios Usi (2 we ca defie wo ceal es we use o descie ou odel fee cash flow ad ieal equiy We defie fee cash flow as he icease i e fiacial asses pio o aki a disiuio, if ay Thus fee cash flow is F (i- X (i-τ - [O (i - O (i-] We defie ieal equiy as he poio of fee cash flow he fi does o disiue o shaeholdes Hece o use ieal equiy eas o eai fee cash 9

12 flow ahe ha o disiue i o shaeholdes Alo wih he issuace of de ad ew exeal equiy, ieal equiy is oe of he fi s hee souces of fiaci We ipose wo esicios o disiuio policy Ay disiuio policy ha saisfies oh codiios is defied as a feasile disiuio policy Fis, disiuios cao e eaive, o D (i 0 i Secod, we place he followi asvesaliy cosai o he aou of de ad fiacial asses he fi ay accuulae: F > li i O ( i > ( i (A2 The pacical effec of his esicio is o peve he fi fo payi oe disiuios ha he opeaios of he fi ca uliaely suppo, ad fo evadi payous foeve houh accuulaio iside he fi Relaive o he odel i Mille 977, which iplicily assues fis ca laely avoid disiuio axes foeve houh eeio, (A2 is a key iovaio 8 The assupio is ased o he ecoiio ha fis ca eely delay hese axes, alhouh hey ay do so fo a vey lo ie (A2 is cosise wih he apped-equiy odels i Aueach 979, Badfod 98, ad Ki 977, excep i coas o hese pio odels we allow fo he use of shae epuchases as well as divideds o disiue cash Fially, we assue he fi is aue I paicula, we assue he fi has posiive pe-exisi equiy, cosisi of eihe paid-i capial o eaied eais, a he 8 The Accuulaed Eais Tax (IRC Secios helps suppo his assupio Tax eulaos ipose he puiive Accuulaed Eais Tax o a copoaio s udisiued eais o he exe he eaied eais ae o equied o ee he easoale usiess eeds of he copay Eve efoe ax eulaos ecoe ivolved, howeve, shaeholdes ofe pu pessue o fis wih lae aous of accuulaed eais o disiue he pofis (see, e, A Cash-Rich Micosof Faces Shaeholde Call fo Divided, Wall See Joual, Jauay 2,

13 ie i chooses is capial sucue ad disiuio policies This assupio is ipoa ecause, as we lae deosae, issui addiioal exeal equiy is suopial, ad wihou pe-exisi equiy, disiuio is a oo issue Iuiively, a aue fi is oe ha is eyod he sa-up sae whee exeal equiy ofe is he picipal souce of capial ecause of iiially low ad hihly uceai cash flows ad ecause of low aial ax aes, which educe o eliiae he eefis of de Thus, he fi ih have had so oives o issue equiy i he pas, eve houh such oives o loe exis ad exeal equiy is su-opial I addiio, eve if a fi is iiially de-fiaced, suvivi fis ypically accuulae ieal equiy ecause i is ifeasile o sucue coie de coacs wih iees ad epaye povisios ha exacly offse he fi s icoe i all saes 9 Theefoe, eve if fis aep o use de o zeo ou hei axale icoe, he fis will eihe have uexpecedly hih eais ad accuulae eaied eais afe payi iees, o have uexpecedly low eais ad ecoe akup ad disappea Fo hese easos, we elieve i is easoale o assue aue fis have posiive exisi equiy, despie hei sic iceive o avoid issui ew exeal equiy 2 Equiliiu Capial Sucue ad Disiuio Policy We ea he choice ewee divideds ad shae epuchases as exoeous o he odel, so we ae paiculaly ieesed i he choice eadi how uch cash o disiue each peiod As deosaed lae, exeal equiy is sicly ifeio o de 9 While his is possile i piciple (see, e, DeAelo ad Masulis, 980a, i would violae he susace ove fo docie, so he Ieal Reveue Sevice would eclassify he de as equiy ad disallow he deducio fo iees

14 fo ay posiive ax ae o disiuios Give a siifica ax ae o equiy disiuios, heefoe he oly fiaci ai ha could poeially lead o a ieio capial sucue soluio is he ai ewee de ad ieal equiy The fi chooses is ix of de ad ieal equiy houh disiuio ii policy Payi a iceeal dolla of fee cash flow ou o shaeholdes a a poi i ie equies he fi o sell (ie, issue a iceeal dolla of de Siilaly, eaii a iceeal dolla of fee cash flow equies he fi o uy (e, pay off a iceeal dolla of de Give his lik ewee disiuios ad capial sucue, ideifyi a ieio soluio fo disiuio ii policy is equivale o ideifyi a ieio soluio ewee de ad ieal equiy Theefoe we ow u o disiuio ii policy, eii i a o-ax sei 2 Disiuio Tii Policy wihou Taxes Give assupios (A ad (A2 i a o-ax sei, he pese values of all feasile disiuio policies ae he sae Moe foally, we povide he followi lea Lea Evey disiuio policy ha saisfies (A2 has he sae pese value Tha is, hee exiss a V such ha i= D( i = V feasile ( i D Poof: See Appedix A Lea saes ha ay chae i disiuio policy us e pese-value pesevi o e feasile Iuiively i siply eflecs he divided displacee popey of Mille ad Modiliai 96 a dolla disiuio displaces a dolla of 2

15 ake value, so assui pefec akes wih o axes, he ii of disiuios is ieleva 22 Disiuio Tii Policy wih Taxes To add axes, we ei y assui hee is oly oe ivese clieele (deoed y, axed a ae o odiay icoe, a ae o capial ais, ad ae d o disiuios hey eceive, whee d is elaed o ad y Give his sile clieele, we ca pove he followi poposiio Poposiio All feasile disiuio policies ae equally aacive if ( d τ = d ( τ = (3 Moeove, if (3 holds, shaeholdes ae idiffee eadi disiuio ii policy, leadi o a ieio capial sucue soluio i which hey ae idiffee ewee de ad ieal equiy I coas, if he lef-had side (LHS of (3 is eae ha he ihhad side (RHS (hih-ax ivesos, he he opiu disiuio policy is o delay payous as lo as possile If he RHS of (3 exceeds he LHS (low-ax ivesos, he he opiu disiuio policy is o pay ou cash as ealy as possile Fially, (3 iplies he ex-disiuio ake value dop due o he paye of a dolla disiuio is: Poof: See Appedix A γ = d = (4 3

16 Iuiively, he LHS of (3 epeses he oal copoae ad pesoal axes o eus o ieal equiy, ad he RHS of he equaio epeses he oal pesoal ax o eus o de Hece he equaio eflecs he fudaeal equiliiu codiio i Mille 977 ha oal copoae ad pesoal axes o equiy us equal he ax o de Noe ha he disiuio ax appeas o oh sides of (3, so i dops ou of he equaio Mille 977 laely dops he disiuio ax y assui disiuios fo equiy ae eihe axed a a vey low ae o eed eve occu, ie, fis ofe ca defe payous idefiiely This is o equied fo equiliiu i ou odel ecause disiuio axes epese suk coss ivesos will icu whehe he fi uses ieal equiy o de o fiace ivese 0 To illusae, oe ha if he fi uses ieal equiy, all eais o he eivesed cash flows will eeae disiuio axes i he fuue O he ohe had, if he fi pays ou fee cash flow as a disiuio ad issues de o fiace ivese, he payou will ie a iediae disiuio ax Eihe way ivesos will icu he disiuio ax a soe poi i ie, ad eihe way he pese value of he ax is he sae, so i dops ou of he equaio This is ue whehe he fi uses divideds o epuchases o disiue equiy Equaio (4 coespods o he failia expessio fo ex-divided pice falloffs ecessay fo he divided displacee popey of Mille ad Modiliai 96 o hold 0 Ou equiliiu also is diffee fo he equiliiu i DeAelo ad Masulis 980a DeAelo ad Masulis 980a, Secio 5 oai idiffeece ewee de ad capial ais, u o do so, hey assue sae-coie de (which is o feasile i pacice, ad hey coclude hee will e zeo divideds I coas, ou equiliiu ewee de ad ieal equiy does o equie sae-coie de, ad i allows fo posiive divideds 4

17 o a afe-ax asis, as fis deived y Elo ad Gue 970 Howeve, (4 is oe eeic ad applies o ay fo of disiuio wih ay ax ude Iuiively, ivesos accou fo fuue disiuio axes whe hey value he fi s equiy, so disiui equiy oly deceases fi value y he afe-pesoal-ax value of he disiuio To ai fuhe isihs io (4, coside wo special cases Fis, if he fi uses divideds o disiue cash, he as oed ealie, = ad d = γ Susiui his chaaceizaio of d io (4 yields: γ = = τ; d = = τ (5 The fis expessio fo γ i (5 is he Elo ad Gue 970 ex-divided expessio The secod expessio fo γ i (5, which is deived fo (3, deosaes ha i equiliiu he ex-divided effec is dive y he copoae ax ae Moeove, i equiliiu, he ax ude of a divided equals he copoae ax ae Secod, if he fi uses shae epuchases o disiue cash, ad if we ake he exee assupio ha he diec ax ude of a epuchase is zeo, he = 0, (4 siplifies o γ =, ad d = 0 Usupisily, heefoe, if he fi ca disiue cash wihou cos, ake value falls dolla fo dolla i disiuios Followi a ixed saey of divideds ad shae epuchases leads o ieediae values fo γ ad fo d, weihed accodi o he elaive use of shae epuchases ad divideds 3 Geeal Equiliiu wih Muliple Clieeles The aalysis i Poposiio chaaceizes a kife-ede equiliiu i which fis ae oly idiffee ewee de ad ieal equiy if iveso ax aes exacly 5

18 alace he copoae ax ae We ow coside a oe eeal sei wih uliple clieeles, as i Mille 977, faci diffee ax aes o iees, capial ais, ad disiuios We shall deosae ha he disiuio-capial sucue idiffeece equiliiu is oe ous i his coex Specifically, a eeal equiliiu is oaied i which he aial clieele ewee de ad equiy saisfies (3, as lo as he aeae capial sucue povides a sufficie supply of equiy (de fo all ivesos who face a lowe (hihe ax ae o equiy ha o de To help chaaceize ou equiliiu, we le W * equal he aeae wealh held y low-ax ivesos who face a lowe o equal ax ae o de vesus equiy, ie, hose ivesos fo who he RHS of (3 is a leas as ea as he LHS We he us add wo ew assupios Fis, we assue ha a each poi i ie W * exceeds he aeae pe-disiuio de level of fis i he ecooy Secod, we assue aual disiuios ae o oo lae i he sese ha he facio of ake value disiued each yea is less ha (his assupio ca e elaxed if < Give hese assupios, we ow descie he eeal equiliiu Poposiio 2 The eeal equiliiu has he followi chaaceisics a Ay iveso fo who he RHS of (3 exceeds he LHS (low-ax ivesos will ives exclusively i de Ay iveso fo who he LHS of (3 exceeds he RHS (hih-ax ivesos will ives exclusively i equiy Ay iveso fo who he LHS of (3 equals he RHS of (3 will e idiffee ewee de ad ieal equiy Thus, ( τ < ives i de ( τ > ives i equiy 6

19 ( τ = idiffee (aial If d > 0, exeal equiy is sicly ifeio o de ad ieal equiy c Ay feasile disiuio policy is opial fo ay idividual fi d The aeae de level is fixed a W*, while o idividual fi will have a uique opial capial sucue e The ake value of equiy i each fi is E = γv, whee γ is ive y (4 ad V is a cosa, defied i Lea Poof: See Appedix A To see how he equiliiu is oaied, coside wha would happe if fis i aeae have de levels less ha W*, codiioal o a se of ieded disiuio policies I his case, low-ax ivesos fo who > τ - would dead oe de ad would e he aial iveso If so, he Poposiio iplies fis would have a iceive o acceleae disiuios fo ieal equiy ad issue eplacee de Fis will coiue o acceleae disiuios ad issue de uil he aeae de level eaches W*, a which ie he aial clieele shifs o whee (3 holds ad fis o loe have a iceive o chae disiuio ii policy Siilaly, if he aeae de level, codiioal o a se of ieded disiuio policies, exceeds W*, he supply of de would exceed dead I his case, fis would have a iceive o delay disiuios fo ieal equiy ad pay off de uil he aial clieele shifs o (3 I equiliiu, heefoe, he supplies of de ad equiy will adjus o esue he aial clieele has ax aes cosise wih (3 This iplies he elaive ax coss of de ad ieal equiy ae equal, so disiuio ii policy ad he choice ewee de ad ieal equiy ae ieleva 7

20 4 Popeies of he Equiliiu 4 Role fo he Disiuio Tax Mille 977 aues ha a low ax ae o equiy is equied o oai equiliiu I coas, Poposiio 2 idicaes ha ay popeies of ou equiliiu ae copleely idepede fo he level of ax o disiuios (d o I paicula, he ideiy of he aial clieele, he aeae de-equiy ix, ad he choice of pofolios y ivesos ae all idepede of he aiude of he ax o disiuios I addiio, ay feasile disiuio ii policy is opial fo ay idividual fi, idepede fo d, which iplies idiffeece ewee usi de ad ieal equiy This is ue ecause ive he aial clieele ecessay fo equiliiu, he pese value of he disiuio ax is he sae eadless of whe he fi pays he disiuio Thus, he ax is uavoidale ad eaed as a suk cos Ideed hee ae oly wo feaues of he equiliiu ha ae a fucio of d Fis, he pice of equiy deceases i d ecause γ = - d Theefoe usi shae epuchases o iiize disiuio axes should icease fi value Secod, if d ( is posiive, he exeal equiy is ifeio o de ad ieal equiy Fuheoe he ifeioiy of exeal equiy iceases i d Theefoe he pesoal ax o equiy dives exeal equiy o a ifeio coe Mille 977 coeplaes ha a sufficiely hih pesoal ax ae o equiy could lead o such a coe soluio As Mille fails o coside, howeve, pushi exeal equiy o a coe does o ecessaily iply a coe soluio fo capial sucue; we sill oai a ieio soluio ewee de ad ieal equiy 8

21 The choice ewee de ad ieal equiy is idepede fo d ecause as a suk cos is effecive ae is zeo Give a effecive ax ae of zeo o disiuios fo equiy, he pesoal ax disadvaae of de eais iac ad equiliiu is oaied I coas d is o a suk cos whe focusi o he ai ewee de ad exeal equiy, so d us acually e zeo o oai idiffeece ewee hese wo souces of capial, ase oax cosideaios The pefeece fo de ad ieal equiy whe d > 0 is, we elieve, a leas soewha descipive of he ecooy, i which fis use lae aous of de ad ieal equiy ad use elaively lile exeal equiy Of couse fis ofe use exeal equiy o fiace ivese i he sa-up phase, which is why we odel he aciviies of aue fis I he sa-up phase, ieal equiy ofe is uavailale I addiio, he fiacial disess coss of de could ceae a pefeece fo equiy i ceai siuaios (see DeAelo ad Masulis, 980, o ifoaio asyey could peve a fi wih posiive NPV ivese oppouiies fo oaii de fiaci, copelli i o issue equiy despie he lae ax pealy As peviously oed, heefoe, we assue he pe-exisece of equiy fo he fi Poposiio 2 he saes if d > 0, hee is a sic ax disadvaae o issui ew exeal equiy 42 Buyi Bods A coo coce aised eadi fis ha puchase lae aous of ods ad ohe akeale secuiies is ha iees eaed wihi he fi is sujec o oh Noe ha ou odel iplies a fi cao siply epuchase shaes o eliiae he ax disadvaae of is pe-exisi exeal equiy Specifically, if a fi issues de ad epuchases exeal equiy, he epuchase ies he equiy disiuio ax, which epeses he ax wede ewee de (o ieal equiy ad exeal equiy capial 9

22 copoae ad pesoal disiuio axes (ie, doule axaio, wheeas iees eaed diecly y ivesos is oly sujec o a sile laye of ax I ou odel his saey oly desoys value if a fi issues exeal equiy o uy he ods If he fi siply ivess fee cash flows i ods, he disiuio ax dops ou of he aalysis as a suk cos Theefoe fis ca ives ieal equiy i ods wihou a iceeal ax pealy, sujec of couse o he asvesaliy codiio 43 The Cos of Capial We ca expess key feaues of ou odel i es of he coss of usi de, ieal equiy, ad exeal equiy Noe ha i all hee cases he aleaive ivese oppouiy wihi ou odel is a axale od, yieldi a afe-ax eu equal o - Of couse, socks ad ods povide ideical afe-ax eus fo he aial clieele The cos of de fiaci equals he afe-ax eu o a axale od, -, adjused fo he copoae ax eefi of de (ueao ad he pesoal ax ivesos pay o od iees (deoiao, o: τ Cos of De = = τ (6 I his case he acual ivese (a axale od is equivale o he aleaive ivese (a axale od, so he wo - es cacel ou ad oly he copoae ax eefi of de eais The cos of ieal equiy fiaci equals he afe-ax eu o a axale od, -, adjused fo he iediae disiuio ax ivesos would have o pay o wihdaw he ieal equiy fo he aleaive axale od ivese (ueao We also us adjus he equaio fo he disiuio ad capial ais axes ivesos will 20

23 eveually icu if he fi eivess he ieal equiy (deoiao Thus, he cos of ieal equiy is: Cos of Ieal Equiy d = = (7 d The cos of exeal equiy is equivale o he cos of ieal equiy excep o disiuio ax us e icued o wihdaw he equiy fo a aleaive ivese Theefoe he -d e dops ou of he ueao of (7 yieldi: Cos of Exeal Equiy = = (8 d Copai (6 ad (7 idicaes he cos of de is equal o he cos of ieal equiy as lo as - /- = -τ, which is he equiliiu codiio expessed i (3 Copai (6 ad (7 o (8 idicaes he cos of exeal equiy is equal o he cos of de ad ieal equiy if = d = 0 This esseially is he special case assued i Mille 977, alhouh ude ceai codiios, Mille s odel leads o a ieio equiliiu if d is slihly posiive I ou odel, exeal equiy ecoes oe cosly ha he ohe wo fos of fiaci fo ay posiive value of d ( I es of he failia afe-ax weihed aveae cos of capial foula (WACC, if we assue equiliiu holds so - /- = -τ, he (6, (7, ad (8 iply he pesoal ax o equiy disiuios ceaes a wede ewee he cos of de ad ieal equiy fiaci o he oe had, ad he cos of exeal equiy fiaci o he ohe Theefoe he odel iplies ieal equiy should e ouped wih de i WACC calculaios, isead of followi he coo pacice of oupi ieal equiy wih exeal equiy (see, e, Bealey ad Myes, 2000, p 543 Of couse, his 2

24 esul asacs fo he poeial oax coss of de, which fuue eseach could icopoae i he odel 44 Fi Value Vesus Shaeholde Wealh A ieesi iplicaio of ou odel is ha susiui de fo ieal equiy, y issui de ad disiui cash o shaeholdes (which occus ay ie de issues ad disiuios occu i he sae peiod iceases fi value u does o affec shaeholde wealh To illusae, coside a fi susiui de fo ieal equiy y issui a dolla of de ad disiui a dolla of cash o shaeholdes Whe disiui he dolla of cash, fi value deceases y he afe-pesoal-ax value of he disiuio, o γ O he ohe had, issui a dolla of de iceases fi value y a full dolla Hece he coied effec of he wo asacios is o icease fi value y -γ Howeve, shaeholdes pay fo he addiioal fi value y icui a e pesoal ax equal o -γ accodi o (4, which pefecly offses he icease i fi value esuli fo he de-ax shield acquied i he asacios A elaed iplicaio is ha disiui a dolla of fee cash flow iceases a fi s ake value peiu elaive o ook value (he valuaio peiu This occus ecause ake value oly deceases y γ, wheeas ook value deceases y a full dolla Oe way o iepe his esul is o oe ha he ecoded ook value of he fi ioes a ipoa liailiy ivesos capialize io fi value; aely, fuue equiy disiuio axes Whe he fi disiues cash, i educes he uecoded ax liailiy as shaeholdes pay he ax o hei ow accous If fis wee o ecod his liailiy fo fuue disiuio axes, he he valuaio peiu would e ivaia o disiuio policy ad capial sucue 22

25 5 Coclusio I his pape, we exed he capial sucue odel i Mille 977 y focusi o aue fis wih pe-exisi equiy ha ca oly e deceased houh axale divided ad shae epuchase disiuios o shaeholdes I coas o Mille s aalysis, we deosae i is o ecessay o have low pesoal axes o equiy o oai a ieio capial sucue equiliiu A ieio soluio is possile i he pesece of susaial axes o divideds ad shae epuchases, eve i he asece of fiacial disess coss fo de I ou equiliiu, hese axes push exeal equiy fiaci aloe o a ifeio coe Fis eai idiffee ewee de ad ieal equiy fiaci, eadless of he aiude of he ax ae o disiuios Ideed, he ax cos of disiui cash o shaeholdes is ieleva fo os aspecs of he equiliiu ecause i dops ou as a suk cos, alhouh i does affec sock pices The odel iplies i is isufficie o view capial sucue i es of de vesus equiy ecause he ax wede ewee ieal ad exeal equiy is poeially lae Capial udei pocedues ad weihed aveae cos of capial foulas should accou fo all hee fos of fiaci The odel also iplies he ii of disiuios does o affec he pese value ax ude, so fis ae fee o disiue equiy wheeve oax facos sues i is opial o do so A fial iplicaio of ou odel is ha exchai de fo ieal equiy iceases fi value u does o icease shaeholde wealh ecause shaeholdes esseially pay fo he addiioal fi value houh pesoal ax payes Theefoe ake evidece of posiive ax eefis 23

26 fo de (see, e, Kesley ad Nissi, 200 does o ecessaily iply leveae ehaces shaeholde wealh Ou ojecive i his sudy has ee o u a sile dial i Mille s odel, which is o add aeial equiy disiuio axes while focusi o aue fis Like Mille 977, heefoe, we have asac fo poeially ipoa facos, icludi ifoaio asyey, fiacial disess coss fo de, ad poeial shifs i clieeles whe fis ale hei disiuio policies I addiio, we ea he choice ewee divideds ad shae epuchases as a exoeous decisio Fuue eseach could uild hese addiioal facos io he odel, leadi o a oe coplee udesadi of de, equiy, ad axes 24

27 Appedix A Poofs Poof of Lea Coside wo feasile disiuio policies, D ( ad D 2 (, ha oh saisfy (A2 Give, we ca deive he coespodi e fiacial asses ude oh policies, F ( ad F 2 ( Defie D * ( ad F * ( as he diffeeces ewee he disiuio ad e fiacial asse sequeces, especively The pese value of D * ( is he diffeece ewee he pese values of he wo disiuio seas Also, ive, F * ( is elaed o D * ( as follows: F * ( i = F = i j= = * ( i D i i j = i j D * * * ( j D ( j j The lii of he su is he pese value of D * ( If his su is o zeo, he F * ( iceases a ae Howeve, accodi o he asvesaliy codiio (A, O ( iceases a a ae lowe ha Cosequeially, fo (A2, F ( ad F 2 ( oh icease a aes lowe ha, iplyi ha F * ( does as well Thus he pese value of D * ( us e zeo, iplyi ha he pese values of D ( ad D 2 ( ae ideical QED Iuiively, his poof suess ha if disiuio policy chaes i a way ha does o peseve he pese value of he disiuio sea, he chae i disiuios will eihe icease o decease he e fiacial asses of he fi Give he copoudi of iees, his diffeece i e fiacial asses will uild up ove ie ad ( i 25

28 ecoe ifiiely lae i he lii This would e icosise wih he asvesaliy codiio, which equies e fiacial asses o ow a a slowe lo-u ae Poof of Poposiio To coside chaes i disiuio policy, we focus o a sile-peiod acceleaio of a dolla of pese value disiuios fo peiod i o peiod i Evey feasile disiuio policy diffes fo evey ohe feasile disiuio policy y a liea coiaio of such oe-peiod shifs i disiuios (a diec cosequece of Lea ; hus, if oe-peiod disiuio shifs ae value eual, all disiuio policies ae equally aacive The specific chae i policy we coside is: Policy D* (i = D (i, D* (i = D (i, ad D* (j = D (j j {i, i} Descipively, he disiuio policy chae (Policy has he fi icease is disiuio y a dolla a ie i, oow ha dolla, ad cu is disiuio (fo wha i would ohewise have ee y $ dollas a ie i The policy chae is feasile (assui ha D (i ecause i does o ale he pese value of he disiuio sequece (y Lea, ad all feasile disiuio policies ae equally aacive if Policy has o effec o shaeholde uiliy If he fi iplees Policy y acceleai he disiuio, shaeholde will eceive a exa dolla a ie i, axed a ae d (γ, ad he ives he afe-ax disiuio a a afe-ax ae of eu * fo oe peiod Fo, d ( γ = γ ( 26

29 27 By acceleai he disiuio y oe peiod, shaeholde eliquishes he disiuio ha would have ee availale i peiod i, equal o -τ Payi a exa disiuio a ie i also educes he ake value of he fi s sock y γ, houh he ex-disiuio effec The disiuio fooe i peiod i he causes he ake value o eu o is iiial ajecoy (ecause all suseque disiuios ae uaffeced y Policy This esuls i a capial ai accual of γ i peiod i Noe ha he secod peiod capial ai accual is oly a γ / [-τ ] facio of he foeoe disiuio i ha peiod Thus, he disiuio ax ae i peiod i is ( d τ γ τ τ γ = All of hese wealh effecs fo he acceleaio of he disiuio fo shaeholde ca e suaized as follows: ] [ ( *, i d d W = τ γ τ γ [ ] [ ] *, ] [ ( ] [ ( i W = γ τ τ γ (B whee W,i is he chae i wealh fo shaeholde, easued a peiod i The fis e o he RHS of equaio (B epeses he eefi shaeholde eceives fo he acceleaed disiuio i peiod i, e of all ax effecs The secod e o he RHS of he equaio epeses he pese value of he cos of eliquishi he disiuio i peiod i If he eefi fo he acceleaed disiuio equals he cos, he W is

30 28 zeo, ad Policy is a eual shif Usi equaio (B ad sei W = 0, we deive he followi equiliiu codiio: [ ] ] [ ( ] [ ( * = γ τ τ γ (B2 We ow coside a ew iveso i he fi a isa afe he disiuio payou a ie i The pice such a iveso is willi o pay fo a ive peceae of he fi is affeced y Policy houh is chaes i fuue disiuios I paicula, he educio i puchase pice esuli fo he disiuio a ie i (which sips equiy fo he fi us exacly copesae he iveso fo he lowe disiuio a ie i (afe also accoui fo he aicipaed ake value chae of γ a ha ie Thus, [ ] ] [ ( ] [ * = γ τ τ γ (B3 Reaai his yields: { } ] ][ ( [ * γ τ γ = ] ][ ( [ * = τ γ (B4 Noe ha he RHS of (B2 is ideical o he RHS of (B3 Thus, hei lef-had sides ae also equal: ( γ γ = = γ (B5 Susiui (B5 io : ( ( d = =

31 Equaio (4 follows iediaely fo he las wo equaios Sei he ih-had sides of (B4 ad (B5 equal o each ohe, ad oi ha a posiive dead fo ods iplies ha * = -, allows us o expess he eual exdisiuio pice effec i es of copoae ad idividual ax aes as follows: = [ ( = = ( τ ][ τ ] * [ τ ] τ = (3 If equaio (3 holds, all disiuio policies ae equally opial Acceleai he disiuio will icease shaeholde wealh if he dop i ake value o he ex-disiuio day, o γ, is less ha -d - /- Give equaio (B4, i ca e deosaed ha his iplies he RHS of (3 exceeds he LHS (he deivaio is diecly aaloous o he aove deivaio of (3, eai ha he afe-ax eu o de is eae ha he afe-ax eu o equiy I his case, Policy iceases shaeholde wealh ecause i acceleaes he disiuio ad allows shaeholdes o ives he fuds i de Ideed, he fi will acceleae disiuios as uch as possile The covese follows fo a siila aue Theefoe he oly ieio soluio occus whe equaio (3 holds QED Poof of Poposiio 2 Give he cojecued pofolios, he ake would clea if fis collecively issue a quaiy of de equal o W * a each poi i ie By assupio, ha level of de could e achieved solely y issui de ad payi disiuios, wihou esoi o exeal equiy Thus, he cojecued ehavio is feasile 29

32 To deosae ha he cojecued ehavio is opial, we fis assue ha (3 holds fo he aial clieele ad deeie ake values (pices of fis ad opial copoae fiacial policy Lae, ive hese pices ad copoae decisios, we will cofi ha ivesos choose he cojecued pofolios ad ha (3 does ideed hold fo he aial clieele Fis, ive ha (3 holds fo he aial clieele, Poposiio iplies ha he ex-disiuio effec, γ, oeys (4, ad sice > 0 (y assupio, γ < Fuhe, Lea iplies ha fo ay feasile disiuio policy, he pese value of all fuue disiuios equals V Clealy, oe such feasile policy is o disiue V iediaely ad he ake o fuhe disiuios If he fi follows such a policy, he he ake value would declie y γv Afe he supe-disiuio, he value of he fi would e 0 (sice hee would e o fuue disiuios Thus, he ake value of he fi pio o aki ay disiuios us e γv Poposiio esues ha ay disiuio policy is equivale o ay ohe, so eadless of wha disiuio policy is chose, he ake value of he fi, E, is γv Nex, we coside he decisio of whehe o issue ew equiy Sice issui $ of equiy iceases V y $, i iceases he ake value of fi y γ < Thus, shaeholdes iediaely lose - γ i he asacio Because issui equiy ies a iediae loss of value wihou ay couevaili eefi, i is sicly suopial i his odel, ad ew equiy is sicly ifeio o de ad ieal equiy Whe focusi o he opialiy of disiuio policy, ecall ha Poposiio has aleady deosaed ha fi disiuio policy is ieleva fo he cojecued aial clieele Thus ay se of disiuio policies y fis ha aiais he 30

33 aeae de level a W* is weakly opial fo copaies sice o fi has a iceive o chae fiacial policy By assupio, such a equiliiu ca exis ecause ase ay disiuios, aeae de would e less ha W*, ad iceases i disiuios would lead o oe de The fial sep i he poof of equiliiu is he deosaio ha ivesos opially choose he cojecued pofolios Coside a iveso wih ax aes of ad o odiay icoe ad capial ais, especively By, his iveso faces a disiuio ax ae of d = ( - γ If he iveso chooses de, he ae of eu is If he iveso chooses equiy, he ae of eu is [ E ( i = e ( i E ( i] d D ( i [ E E ( i ( i E ( i γd ( i ] (B6 Noe ha E (i is he ake value of he fi iediaely afe he disiuio a ie i The eu has hee pas, he icease i ake value, he afe-ax disiuio (icludi capial ais/losses o he ex-disiuio pice dop, ad he capial ais ax o pice appeciaio (pe-disiuio As show aove, E (i equals γv (i Based o Lea, he followi us hold V ( i = [ τ ] V ( i D ( i (B7 Susiui (B7 io (B6: γ{[ τ ] V ( i = e ( i D ( i V E ( i ( i} [ ] D ( i τ E ( i = e ( i [ γ ] D E ( i ( i (B8 Susiui (4 io (B8: 3

34 32 ( ( ( i E i D i e = τ (B9 Coside hee oups of ivesos Fis, fo hose fo who (3 holds, he e i ackes is zeo (ecause i ha case, = ad =, so (B9 educes o --τ, which y (3 equals -, he eu o de Thus, as cojecued, his clieele is idiffee ewee de ad equiy ad is he aial clieele Now coside he oup of ivesos fo who he LHS of (3 exceeds he RHS The e i ackes i (B9 is eaive fo his clieele (ecause -/- < -τ = - /- By assupio D (i / E (i <, so ( e i > τ ( e i > ( ( e i > ( e i > [ ] ( e i > τ [ ] ( e i > ( e i > This deosaes ha, fo his clieele, he eu o equiy exceeds he eu o de, so he cojecued pofolio choice is opial A siila aue ca e used o show ha fo ivesos such ha he RHS of (3 exceeds he LHS, he eu o de is hihe ha he eu o equiy Thus, all of he cojecued pofolios ae opial QED

35 Refeeces Aueach, A J, 979, Wealh Maxiizaio ad he Cos of Capial, Quaely Joual of Ecooics, Badfod, D F, 98, The Icidece ad Allocaio Effecs of a Tax o Copoae Disiuios, Joual of Pulic Ecooics, 5, -22 Bealey, R A, ad S C Myes, 2000, Piciples of Copoae Fiace, Sixh Ediio, Iwi McGaw-Hill Chowdhy, B, ad V Nada, 994, Repuchase Peia as a Reaso fo Divideds: A Dyaic Model of Copoae Payou Policies, The Review of Fiacial Sudies, 7, DeAelo, H, ad R W Masulis, 980a, Leveae ad Divided Ielevacy Ude Copoae ad Pesoal Taxaio, Joual of Fiace, 35, DeAelo, H, ad R W Masulis, 980, Opial Capial Sucue Ude Copoae ad Pesoal Taxaio, Joual of Fiacial Ecooics, 8, 3-29 Elo, E, ad M Gue, 970, Maial Sockholde Tax Raes ad he Clieele Effec, Review of Ecooics ad Saisics, 52, Faa, E F, ad K R Fech, 200, Disappeai Divideds: Chai Fi Chaaceisics o Lowe Popesiy o Pay? Joual of Fiacial Ecooics, 60, 3-43 Faa, E F, ad K R Fech, 2002, Tesi Tade-off ad Pecki Ode Pedicios aou Divideds ad De, The Review of Fiacial Sudies, 5, -33 Gee, R C, ad B Hollifield, 200, The Pesoal-Tax Advaaes of Equiy, Woki Pape, Caeie Mello Uivesiy Guay, W, ad J Hafod, 2000, The Cash-Flow Peaece ad Ifoaio Coe of Divided Iceases Vesus Repuchases, Joual of Fiacial Ecooics, 57, Hausch, D B, ad J K Sewad, 993, Siali wih Divideds ad Shae Repuchases: A Choice ewee Deeiisic ad Sochasic Cash Disusees, The Review of Fiacial Sudies, 6, 2-53 Jaaaha, M, C P Sephes, ad M S Weisach, 2000, Fiacial Flexiiliy ad he Choice ewee Divideds ad Sock Repuchases, Joual of Fiacial Ecooics, 57, Kesley, D, ad D Nissi, 200, Valuaio of he De-Tax Shield, fohcoi i he Joual of Fiace 33

36 Ki, M A, 977, Pulic policy ad he copoaio Lodo: Chapa ad Hall Mille, M, 977, De ad Taxes, Joual of Fiace, 32, Mille, M H, ad F Modiliai, 96, Divided Policy, Gowh, ad he Valuaio of Shaes, Joual of Busiess, 34, Myes, S C, 984, The Capial Sucue Puzzle, Joual of Fiace, 39, Myes, S C, ad N S Majluf, 984, Copoae Fiaci ad Ivese Decisios whe Fis Have Ifoaio Tha Ivesos Do No Have, Joual of Fiacial Ecooics, 3, Willias, M G, 200, Taxes ad Risk i Fiacial Makes: A Sepaaio Resul, Woki Pape, UCLA 34