Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/75648
Authors: 
Mintz, Jack
Smart, Michael
Year of Publication: 
2000
Series/Report no.: 
CESifo Working Paper 242
Abstract: 
Investors frequently hold equity in tax-exempt savings vehicles such as pension plans, despite the prediction of the standard model that they hold only bonds. We provide a new explanation for this empirical puzzle based on differences between pensions and taxable assets in the tax treatment of capital losses. We show how limits on refundability of losses on taxable equities leads to diversity of investors' preferences for corporate leverage on the basis of tax rates. In the simplest equilibrium of the model, tax-exempt savers hold risky, highly leveraged equities, while low-bracket taxable savers hold bonds and high-bracket taxpayers hold relatively safe, unleveraged equities. We discuss the implications of tax-exempts for risk taking and agency costs within the firm.
Document Type: 
Working Paper

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