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Preferred Stocks and Taxes


In this paper we show the possibility of existence of preferred stocks in a tax induced equilibrium. We show that the Miller equilibrium framework can accommodate more than two securities if different investor classes are taxed differently and the tax schedule is not flat. The introduction of uncertainty, bankruptcy, and loss of tax shelters allows for another component which can create equilibrium i.e. seniority. The equilibrium is obtained by equating the expected marginal tax benefit of all securities. Comparative statics with respect to various tax rates are derived as well.

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