The way in which taxation affects corporate financial policy, and the level of investment through the structure of the cost of capital, is still a bone of contention. Various specifications of the cost of capital have been used in econometric models (for example, Jorgenson [3]) although in a recent theoretical paper Stiglitz [10] has claimed that, ignoring uncertainty, the cost of capital is simply the rate of interest.3 In this paper we shall analyse the effect of personal and corporate taxation on both the firm's choice of financial policy and its investment decision. We shall see that the latter is influenced by the former because the cost of capital depends upon the optimal financial policy. The results have implications for the specification of the neoclassical investment model which has come to play such an important part in the econometric study of investment behaviour, because the cost of capital is a good deal more complicated than most of this work allows for. Another problem which will be examined is how expectations of future changes in tax rates affect the firm's policy. In recent years governments have often announced tax changes in advance, and increasing attention is being paid to the use of announcements of future tax changes as a policy tool in its own right. These announcement effects can have a significant impact on investment behaviour. To make it easier to see the role of taxation we shall assume a world of perfect certainty. There are three justifications for this neglect of uncertainty. First, when tax changes are announced in advance, expectations that these changes will take place are held with a very high degree of certainty. Secondly, this assumption makes our results directly comparable with those of the neoclassical investment model. Finally, in a world of certainty we know that the firm will, if it is acting in the shareholders' interests, maximize the market value of the stock. But in a world of uncertainty which does not have a complete set of Arrow-Debreu markets it is not clear just what the firm should be trying to maximize. This is because shareholders have different subjective beliefs about what the best policy is, and there are no contingent commodity markets for them to hedge on. If one shareholder believes that the firm would make enormous profits by drilling for oil in the North Sea and nobody else believes that this would be successful, then for this shareholder the optimal policy is to drill even though the market value of the firm's stock would slump in the short run.4 Section 2 discusses a model of the valuation of the company and the way in which this is influenced by taxation. This brings out the interaction between the systems of personal and corporate taxation. In Section 3 we analyse the firm's optimal financial policy where it has a choice between financing investment by using retentions, borrowing, or

Journal Article Corporate Taxation and Dividend Behaviour: a further Comment Get access M. A. King M. A. King University of Cambridge and Harvard University Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 39, Issue 2, April 1972, Pages 231–234, https://doi.org/10.2307/2296875 Published: 01 April 1972

Journal Article Corporate Taxation and Dividend Behaviour—A Comment Get access M. A. King M. A. King University of Cambridge Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 38, Issue 3, July 1971, Pages 377–380, https://doi.org/10.2307/2296390 Published: 01 July 1971

Optimal monetary policy maximizes the welfare of a representative agent, given frictions in the economic environment. Constructing a model with two sets of frictions—costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods—we find optimal monetary policy is governed by two familiar principles. First, the average level of the nominal interest rate should be sufficiently low, as suggested by Milton Friedman, that there should be deflation on average. Yet, the Keynesian frictions imply that the optimal nominal interest rate is positive. Second, as various shocks occur to the real and monetary sectors, the price level should be largely stabilized, as suggested by Irving Fisher, albeit around a deflationary trend path. Since expected inflation is roughly constant through time, the nominal interest rate must therefore vary with the Fisherian determinants of the real interest rate. Although the monetary authority has substantial leverage over real activity in our model economy, it chooses real allocations that closely resemble those which would occur if prices were flexible. In our benchmark model, there is some tendency for the monetary authority to smooth nominal and real interest rates.

We develop a model of search and unemployment in an economy consisting of a large number of spatially separated local competitive labour markets and aggregate uncertainty. If aggregate shocks are positively autocorrelated, the implied cyclical behaviour of the aggregate variables match those of empirical studies: worker movement and job creation are procyclical while total unemployment, job destruction and job reallocation are countercyclical.

This paper examines testing for AR(1) disturbances against MA(1) disturbances in the linear regression model. A Monte Carlo experiment compares the small-sample properties of the Cox test, some linearized Cox tests, and an approximate point optimal test, as well as a Lagrange multiplier test of AR (1) disturbances against ARM A (1,1) disturbances. The main findings are that the true sizes of the asymptotic non-nested tests can differ considerably from their nominal sizes, the Lagrange multiplier test's sizes are reasonably accurate and the point optimal test is generally more powerful than the other tests when appropriate critical values are used. When sizes are controlled at an arbitrary value of the AR (1) parameter, the relative power of the Cox test is increased substantially.