Taxes, Regulations, and Asset Prices / Ellen R. McGrattan, Edward C. Prescott.

Format:

Book

Author/Creator:

McGrattan, Ellen R.

Contributor:

National Bureau of Economic Research.

Prescott, Edward C.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8623.

NBER working paper series no. w8623

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

U.S. stock prices have increased much faster than gross domestic product (GDP) in the postwar period. Between 1962 and 2000, corporate equity value relative to GDP nearly doubled. In this paper, we determine what standard growth theory says the equity value should be in 1962 and 2000, the two years for which our steady-state assumption is a reasonable one. We find that the actual valuations were close to the theoretical predictions in both years. The reason for the large run-up in equity value relative to GDP is that the average tax rate on dividends fell dramatically between 1962 and 2000. We also find that, given legal constraints that effectively prohibited the holding of stocks as reserves for pension plans, there is no equity premium puzzle in the postwar period. The average returns on debt and equity are as theory predicts.

Notes:

Print version record

December 2001.