Government Debt and Private Leverage: An Extension of the Miller Theorem

Abstract

This paper shows how government financing decisions can influence the corporate decision to use debt or equity finance. In particular, it is shown that an increase in the stock of taxable government debt reduces the equilibrium quantity of corporate debt, and that an increase in the stock of tax-free government debt reduces the equilibrium quantity of corporate equity. The effects of inflation rate and tax rate changes are also considered.

A century of capital structure: The leveraging of corporate America

“…First, our results are consistent with government deficit financing crowding out corporate debt financing through competition for investor funds (Friedman, 1986). Second, and closely related, market imperfections, such as taxes (McDonald, 1983), informational frictions (Greenwood, Hanson, and Stein, 2010), and transaction costs (Krishnamurthy and Vissing-Jørgensen, 2012) generate an imperfectly elastic demand curve for corporate debt, as investors are no longer able to costlessly transform return streams from corporations to match their consumption needs. Consequently, fluctuations in the supply of government debt, a substitute for corporate debt, can shift the demand curve for corporate debt in a manner that affects equilibrium quantities.…”

“…Fluctuations in the supply of competing securities shift the demand curve for corporate debt in the opposite direction. One such substitute receiving significant theoretical attention is government bonds (e.g., Taggart, 1985;McDonald, 1983;Friedman, 1986). During the last century, government debt experienced several notable transitions, beginning with a dramatic expansion to fund World War II.…”

“…Prior studies use alternative data sources to examine components of the broader trends and issues explored here. Using aggregate data, some authors note a fairly stable leverage ratio over time (Sametz, 1964;Wright, 2004;Frank and Goyal, 2008), while others note varying degrees of increase in the leverage ratio during the post-WW II era (e.g., Miller, 1977;Taggart, 1985;McDonald, 1983). 4 Using Compustat data, Gordon and Malkiel (1981), Philippon (2009), Strebulaev andYang (2013), and DeAngelo and Roll (2014) document an increase in leverage and a decrease in the proportion of conservatively levered firms in the second half of the 20th century.…”

Changes in the Capital Structure of Polish Companies During the Last Twenty Years (1997–2017)

“…Some authors of capital structure studies reported that the share of debt in company financing is stable in the long term (Sametz, 1964;Wright, 2004;frank & Goyal, 2008) or showed a different degree of debt increase in the post-war period (Miller, 1977;Taggart, 1985;McDonald, 1983). Gordon and Malkiel (1981), Philippon (2012), Strebulaev andYang (2013), andDeAngelo andRoll (2014) demonstrated that the debt level of US companies had increased in the second half of the 20 th century, while the proportion of organisations with relatively low debt had declined.…”

Expected Future Tax Policy and Tax-Exempt Bond Yields

“…My discussion of municipal debt in the Miller Model draws heavily on Auerbach andKing (1983) andMcDonald (1983).…”