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Fiscal policies and asset prices

Journal

Review of Financial Studies

Subject

Finance

Publishing details

Review of Financial Studies 2012 Vol 25:9 p 2635-2672

Authors / Editors

Croce M M;Kung H;Nguyen T T;Schmid L

Biographies

Howard Kung

Publication Year

2012

Abstract

The surge in public debt triggered by the financial crisis has raised uncertainty about future tax pressure and economic activity. We examine the asset pricing effects of fiscal policies in a production-based general equilibrium model in which taxation affects corporate decisions by: (1) distorting profits and investment; (2) reducing the cost of debt through a tax shield; and (3) depressing productivity growth. In settings with recursive preferences, these three tax-based channels generate sizable risk premia, making tax uncertainty a first-order concern. We document further that corporate tax smoothing can substantially alter the effects of public expenditure shocks.

Keywords

Asset; fiscal policies

Available on ECCH

No


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