Premium
The Asset Price Theory of Shareholder Revaluations: Tests with the Tax Reforms of the 1980s
Author(s) -
Downs Thomas W.,
Demirgures Cuneyt
Publication year - 1992
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1992.tb01312.x
Subject(s) - economics , monetary economics , shareholder , deferred tax , incentive , tax reform , tax reform act , investment (military) , financial economics , finance , state income tax , microeconomics , public economics , gross income , corporate governance , politics , political science , law
A tax reform providing incentives for fixed investment may increase shareholder wealth because after‐tax cash flows on planned investment increase. Alternatively, shareholder wealth may decline because existing assets receive disadvantageous tax treatment relative to new ones and equities are largely claims on existing assets. This study tests the alternative hypothesis by predicting in a simulation model the revaluation of existing assets resulting from the 1981 and 1986 tax acts and then by comparing the predictions to stock returns data. The results reject the hypothesis that cumulative excess returns accruing because of tax reform equal the revaluation on existing assets.