Staff Report 309

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Taxes, Regulations, and the Value of U.S. and U.K. Corporations

Ellen R. McGrattan - Consultant
Edward C. Prescott - Senior Monetary Advisor

Revised May 1, 2005

Abstract
We derive the quantitative implications of growth theory for U.S. corporate equity plus net debt over the period 1960–2001. There were large secular movements in corporate equity values relative to GDP, with dramatic declines in the 1970s and dramatic increases starting in the 1980s and continuing throughout the 1990s. During the same period, there was little change in the capital-output ratio or earnings share of output. We ask specifically whether the theory accounts for these observations. We find that it does, with the critical factor being changes in the U.S. tax and regulatory system. We find that the theory also accounts for the even larger movements in U.K. equity values relative to GDP in this period.

RELATED PAPERS: Data Appendix, Staff Report 294 The 1929 Stock Market: Irving Fisher Was Right, Staff Report 313 Average Debt and Equity Returns: Puzzling? and Quarterly Review articles (Vol. 24, No. 4, Fall 2000) The Declining U.S. Equity Premium and Is the Stock Market Overvalued?


Published In: Review of Economic Studies (Vol. 72, No. 3, July 2005, pp. 767-796)

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