Taxes, regulations, and the value of U.S. and U.K. corporations

Ellen R. McGrattan; Edward Prescott

doi:10.1111/j.1467-937X.2005.00351.x

Taxes, regulations, and the value of U.S. and U.K. corporations

Ellen R. McGrattan, Edward Prescott

Economics

Research output: Contribution to journal › Article › peer-review

146 Scopus citations

Abstract

We derive the quantitative implications of growth theory for U.S. corporate equity plus net debt over the period 1960-2001. There were large secular movements in corporate equity values relative to GDP, with dramatic declines in the 1970's and dramatic increases starting in the 1980's and continuing throughout the 1990's. During the same period, there was little change in the capital-output ratio or earnings share of output. We ask specifically whether the theory accounts for these observations. We find that it does, with the critical factor being changes in the U.S. tax and regulatory system. We find that the theory also accounts for the even larger movements in U.K. equity values relative to GDP in this period.

Original language	English (US)
Pages (from-to)	767-796
Number of pages	30
Journal	Review of Economic Studies
Volume	72
Issue number	3
DOIs	https://doi.org/10.1111/j.1467-937X.2005.00351.x
State	Published - Jul 2005

ASJC Scopus subject areas

Economics and Econometrics

Access to Document

10.1111/j.1467-937X.2005.00351.x

Cite this

@article{8c7200f03ea1499d9312679d8fb165db,

title = "Taxes, regulations, and the value of U.S. and U.K. corporations",

abstract = "We derive the quantitative implications of growth theory for U.S. corporate equity plus net debt over the period 1960-2001. There were large secular movements in corporate equity values relative to GDP, with dramatic declines in the 1970's and dramatic increases starting in the 1980's and continuing throughout the 1990's. During the same period, there was little change in the capital-output ratio or earnings share of output. We ask specifically whether the theory accounts for these observations. We find that it does, with the critical factor being changes in the U.S. tax and regulatory system. We find that the theory also accounts for the even larger movements in U.K. equity values relative to GDP in this period.",

author = "McGrattan, {Ellen R.} and Edward Prescott",

note = "Funding Information: Substituting (B.9) and (B.10) into the L.H.S. of (B.7) gives the expression (29) for τδ. Substituting (B.7) into (B.6) gives the expression (28) for the equity price. ‖ Acknowledgements. We thank Andy Abel, Alan Auerbach, Bob Hall, Ravi Jagannathan, Urban Jermann, Narayana Kocherlakota, Lee Ohanian, Jim Poterba, Kathy Rolfe, Bob Shiller, four anonymous referees, and the editor for their comments. We thank Martin Weale and Shane Duffield for their help with U.K. data. We also thank the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.",

year = "2005",

month = jul,

doi = "10.1111/j.1467-937X.2005.00351.x",

language = "English (US)",

volume = "72",

pages = "767--796",

journal = "Review of Economic Studies",

issn = "0034-6527",

publisher = "Oxford University Press",

number = "3",

}

TY - JOUR

T1 - Taxes, regulations, and the value of U.S. and U.K. corporations

AU - McGrattan, Ellen R.

AU - Prescott, Edward

N1 - Funding Information: Substituting (B.9) and (B.10) into the L.H.S. of (B.7) gives the expression (29) for τδ. Substituting (B.7) into (B.6) gives the expression (28) for the equity price. ‖ Acknowledgements. We thank Andy Abel, Alan Auerbach, Bob Hall, Ravi Jagannathan, Urban Jermann, Narayana Kocherlakota, Lee Ohanian, Jim Poterba, Kathy Rolfe, Bob Shiller, four anonymous referees, and the editor for their comments. We thank Martin Weale and Shane Duffield for their help with U.K. data. We also thank the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

PY - 2005/7

Y1 - 2005/7

N2 - We derive the quantitative implications of growth theory for U.S. corporate equity plus net debt over the period 1960-2001. There were large secular movements in corporate equity values relative to GDP, with dramatic declines in the 1970's and dramatic increases starting in the 1980's and continuing throughout the 1990's. During the same period, there was little change in the capital-output ratio or earnings share of output. We ask specifically whether the theory accounts for these observations. We find that it does, with the critical factor being changes in the U.S. tax and regulatory system. We find that the theory also accounts for the even larger movements in U.K. equity values relative to GDP in this period.

AB - We derive the quantitative implications of growth theory for U.S. corporate equity plus net debt over the period 1960-2001. There were large secular movements in corporate equity values relative to GDP, with dramatic declines in the 1970's and dramatic increases starting in the 1980's and continuing throughout the 1990's. During the same period, there was little change in the capital-output ratio or earnings share of output. We ask specifically whether the theory accounts for these observations. We find that it does, with the critical factor being changes in the U.S. tax and regulatory system. We find that the theory also accounts for the even larger movements in U.K. equity values relative to GDP in this period.

UR - http://www.scopus.com/inward/record.url?scp=22144489469&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=22144489469&partnerID=8YFLogxK

U2 - 10.1111/j.1467-937X.2005.00351.x

DO - 10.1111/j.1467-937X.2005.00351.x

M3 - Article

AN - SCOPUS:22144489469

SN - 0034-6527

VL - 72

SP - 767

EP - 796

JO - Review of Economic Studies

JF - Review of Economic Studies

IS - 3

ER -

Taxes, regulations, and the value of U.S. and U.K. corporations

Abstract

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Cite this