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Title:The equity trap, the cost of capital and the firm's growth path PDF Logo
Authors:Lindhe, Tobias
Södersten, Jan
Issue Date:2006
Series/Report no.:CESifo working paper 1801
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 size 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.
JEL:H24
H25
H32
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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