Taxes and Financing Decisions

  title={Taxes and Financing Decisions},
  author={Jonathan Lewellen and Katharina Lewellen},
This paper studies the tax effects of financing decisions. We show that subtle, often unstated, tax assumptions play a key role in many capital structure theories, including in the models of Miller (1977), Auerbach (1979), and Hennessy and Whited (2004). Our central thesis is that, under quite general conditions, the tax costs of internal equity are less than the tax costs of external equity. It follows that optimal leverage is a function of internally generated cashflows, that debt ratios can… CONTINUE READING

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