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Taxes, Financing Decisions, and Firm Value
Author(s) -
Fama Eugene F.,
French Kenneth R.
Publication year - 1998
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00036
Subject(s) - profitability index , dividend , debt , equity value , economics , enterprise value , debt financing , value (mathematics) , tax shield , business , monetary economics , finance , external debt , tax reform , public economics , debt levels and flows , state income tax , machine learning , computer science , gross income
We use cross‐sectional regressions to study how a firm's value is related to dividends and debt. With a good control for profitability, the regressions can measure how the taxation of dividends and debt affects firm value. Simple tax hypotheses say that value is negatively related to dividends and positively related to debt. We find the opposite. We infer that dividends and debt convey information about profitability (expected net cash flows) missed by a wide range of control variables. This information about profitability obscures any tax effects of financing decisions.