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Author(s)

Robert L. McDonald

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.
Date Published: 1983
Citations: McDonald, Robert L.. 1983. Government debt and private leverage: An extension of the Miller Theorem. Journal of Public Economics. (3)303-325.