| Budget Amount *help |
¥2,100,000 (Direct Cost: ¥2,100,000)
Fiscal Year 1998: ¥500,000 (Direct Cost: ¥500,000)
Fiscal Year 1997: ¥500,000 (Direct Cost: ¥500,000)
Fiscal Year 1996: ¥1,100,000 (Direct Cost: ¥1,100,000)
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| Research Abstract |
M-M theory (Modigliani Franco and Merton MilIer, 1958) says that investment is independent of how it is financed.
Indeed , this is true if there are no taxes or if there are no bankruptcies and the corporate tax rate is equal to the individual marginal tax rate (with the dividend tax and the capital gains tax rates being zero) But if both taxes and bankruptcies are present the value of the firm is not independent of its financial structure and the firm's investment and financial decisions are interrelated.
A tax-based model assumes that the firm determines investment and financial policies so as to maximize its share price while allowing many menus of tax rates. The main results of this model can be summarized as follows.
If the firm's after tax profits are small relative to the level of investment, the firm finances investment by retention and debt.
If they are large relative to the level of investment, additional investment projects are financed with new shares and debt. In the intermediate case, additional finance comes entirely through debt.
However this model doesn't explain the fact that firms pay dividends, despite obvious tax disadvantages. Nor does it explain the common practice of paying dividends and issuing new equity simultaneously, since a company could presumably reduce dividends and new equity issues by equal amounts, thereby reducing tax liabilities without altering net distributions.
Why do companies pay dividends ?
This is next question that has proven to be one of the most vexing puzzles in economics.
Many theories including the tax-based model have been proposed, but none has earned general acceptance. In this project, I aim to offer another explanation of the dividend puzzle and financial hierarchy, based upon a simple model in which firms attempt to signal profitability by distributing cash to shareholders.
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