Academic finance has explored the effect of taxes on corporate capital structure in great detail. By contrast, the effect of taxes on the capital structure of partnerships, REIT's, and related entities has received little attention. The present paper shows that, under general conditions, the values of partnerships and REIT's are invariant to leverage, contradicting the sparse literature in the area. A proof similar to that of Modigliani‐Miller is employed. The effect of real world imperfections is also examined.

Academic finance has explored the effect of taxes on corporate capital structure in great detail. By contrast, the effect of taxes on the capital structure of partnerships, real estate investment trusts, and related entities has received little attention. The present paper shows that, under general conditions, the values of partnerships and real estate investment trusts are invariant to leverage, contradicting the sparse literature in the area. A proof similar to that of Modigliani-Miller is employed. The effect of real world imperfections is also examined.

The basic theoretical relationships between the value of the firm and leverage were set forth by Modigliani and Miller (MM). Much work has tested the MM relationships empirically, including studies which used data from regulated industries. Gordon has stated that, because earnings before interest and taxes are not held constant in regulated industries, the MM formula used in empirical work is invalid. However, Elton-Gruber (EG) challenge Gordon’s statement. The present paper shows that both the Gordon and the EG formulae hold only under special conditions. Under "normal" conditions of demand, both formulae underestimate the value of the levered firm. We show that there is no a priori method of estimating the effect of leverage on the value of a regulated firm without knowledge of specific supply and demand conditions. As researchers do not usually know these conditions, the results of papers testing the MM propositions with data on regulated industries are ambiguous. General formulae for the discount rate and the valuation of a levered firm in a regulated industry are presented.

Jeffrey F. Jaffe, Gershon Mandelker, The "Fisher Effect" for Risky Assets: An Empirical Investigation, The Journal of Finance, Vol. 31, No. 2, Papers and Proceedings of the Thirty-Fourth Annual Meeting of the American Finance Association Dallas, Texas December 28-30, 1975 (May, 1976), pp. 447-458