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UNANTICIPATED INFLATION, TAXATION, AND COMMON STOCKS
Author(s) -
Kanniainen Vesa
Publication year - 1982
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1982.tb01007.x
Subject(s) - economics , indexation , monetary economics , inflation (cosmology) , equity (law) , depreciation (economics) , debt , book value , amortization , macroeconomics , finance , microeconomics , monetary policy , capital formation , profit (economics) , earnings , physics , financial capital , theoretical physics , political science , law
This paper focuses on the effects of unanticipated inflation on the market value of equity in a system with corporation tax and historic cost depreciation. It is shown that there exists a unique combination of debt and equity under which inflation neutrality is obtained, Whether or not unanticipated inflation hurts or benefits the stockholders in a particular firm depends upon a number of conditions. These include the depreciation rate of its assets relative to the amortization rate of its debt. Finally, the present tax system is contrasted with a fully indexed system involving replacement cost depreciation and indexation