Scandinavian Working Papers in Economics
Working Paper Series,
Uppsala University, Department of Economics
No 2006:19: The Equity Trap, the Cost of Capital and the Firm´s Growth Path
Tobias Lindhe and Jan Södersten ()
Additional contact information
Tobias Lindhe: Finansdepartementet, Postal: Skatte- och Tullavdelningen, 103 33 STOCKHOLM, Sweden
Jan Södersten: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Abstract: This paper reconsiders Sinn’s (1991) nucleus theory of the corporation by comparing two different regimes for the equity trap. In the first of these, all cash paid to the shareholders is taxed as dividends, in the second, shareholders are allowed a tax-free return of capital contributed through new issues. A substantial difference is found between the regimes in the seize of initial equity injections, although in both regimes, no dividends are paid until a new long-run equilibrium is reached. Contrary to Sinn, we find that with optimal behavior, the cost of new equity is lower than suggested by conventional formulae.
Keywords: dividend taxation; equity trap; cost of capital; nucleus theory; growth path
20 pages, September 5, 2006
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