TITLE

Pass-Through Taxation and the Value of the Firm

AUTHOR(S)
Jalbert, Terrance
PUB. DATE
June 2002
SOURCE
American Business Review;Jun2002, Vol. 20 Issue 2, p47
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
In this paper valuation and optimal capital structure conditions are further explored. Specifically, valuation equations are developed for both DTFs and PTFs. The valuation equations are developed for no growth perpetual earning firms. The equations are developed for levered firms, referring to firms that use debt, and unlevered firms, referring firms that do not used debt. The valuation equations developed in this paper suggest that the value of PTFs will be higher than the value of DTFs when NOI is held constant across firms. In addition, the equations suggest that the gain from using debt is larger for DTFs than for PTFs. Finally, it is suggested that DTFs continue to exist in the economy, despite their valuation disadvantage, because they possess organizational characteristics not available in PTFs. These implications of the model are tested using a sample of ninety-four matched pairs of C corporations and MLPs. This work is particularly important given the increasing availability of organizational forms, such as limited liability companies, whose earnings are subject to the pass-through taxation system. In order to make informed decisions concerning which organizational form is best for a firm, managers must evaluate the value of the firm, the optimal capital structure, and the dividend policy as well as other issues under the two taxation systems. The remainder of this paper is organized as follows. In Section II a theoretical model of the value of the firm is presented along with implications of the model. In Section III data and a methodology for testing the implications of the model are discussed and in Section IV the test results are reported. Finally Section V contains a summary of the paper.
ACCESSION #
6923274

 

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