Risk and the miller equilibrium: Capital structure choice with risk-averse investors |
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Authors: | William Steven Smith James Allen Conover |
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Institution: | (1) College of Business, Bloomsburg University of Pennsylvania, 17815 Bloomsburg, Pennsylvania;(2) Department of Finance, Insurance, Real Estate and Law, College of Business Administration, University of North Texas, 76203 Denton, Texas |
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Abstract: | Merton Miller's (1977) tax model of equilibrium capital structure choice results in capital structure irrelevance and the
existence of tax clienteles, assuming the restrictive case of risk-neutrality. Relaxation of the assumption of risk-neutrality
in Miller's tax framework, allowing utility-maximizing risk-averse investors, indicates that capital structure irrelevance
continues to hold under reasonable assumptions about utility. Evaluation of resulting tax clienteles shows that marginal tax
rates do not restrict investors from investing in equities but do affect the tax status of purchased bonds. |
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