Taxes, Financing Decisions, and Firm Value

Authors

  • Eugene F. Fama,

    1. Graduate School of Business, University of Chicago
    Search for more papers by this author
  • Kenneth R. French

    1. Yale School of Management
    Search for more papers by this author
    • Graduate School of Business, University of Chicago (Fama) and Yale School of Management (French). We acknowledge the comments of Judith Chevalier, John Cochrane, Anil Kashyap, Owen Lamont, Mark Mitchell, Raghuram Rajan, Robert Vishny, Roman Weil, Janice Willett, Luigi Zingales, René Stulz, Sheridan Titman, and two referees.


Abstract

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.

Ancillary