A MODEL TO MEASURE THE EFFECTS OF TAXES ON THE REAL AND FINANCIAL DECISIONS OF THE FIRM

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Abstract
This paper presents a model for the analysis of the joint effects of taxation on the real and financial decisions of the firm. The model is composed of three recursive equations: a dividend payout rate equation, an external financing-mix equation, and an investment equation. The link between the real and financial decisions is established via the cost of capital and cash flow. The model is empirically tractable. The empirical analysis shows, in particular, that linking the real and financial decisions helps explain corporate investment behavior, and that personal income taxation affects corporate investment through its effect on dividend payout.