Share This Article:

Corporate Financing, Taxation, and Tobin’s q: Evidence from Japanese Firms and Industries

Abstract Full-Text HTML XML Download Download as PDF (Size:399KB) PP. 27-45
DOI: 10.4236/jmf.2013.33A004    4,410 Downloads   6,463 Views  


This paper addresses the question of how taxation affects the cost of capital of firms and value of firms as measured by Tobin’s q. We construct a Real Business Cycle model and derive our original unlevered q on an after-tax basis, by removing financial tax shield effects in order to disentangle real operating profitability of firms and their financing decisions. Our model is an extended version of the two-sector general equilibrium model originally developed by Christiano and Fisher [1] and can incorporate both corporate and individual taxation. The unlevered q-value is derived from our general equilibrium solutions and some comparative static results are demonstrated with model predictions. In an empirical section of the paper, we find that the data support these model predictions, and thus they rationalize the use of our unlevered q. Our result possesses important policy implications for financial managers of the firms in correctly identifying firms’ true profitability aside from corporate tax shields as well as for the tax authority in changing the regulatory corporate tax rates.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

K. Kubota, S. Saito and H. Takehara, "Corporate Financing, Taxation, and Tobin’s q: Evidence from Japanese Firms and Industries," Journal of Mathematical Finance, Vol. 3 No. 3A, 2013, pp. 27-45. doi: 10.4236/jmf.2013.33A004.


[1] L. J. Christiano and J. D. M. Fisher, “Tobin’s q and Asset Returns: Implications for Business Cycle Analysis,” Staff Report 200, Federal Reserve Bank of Minneapolis, 1995.
[2] E. R. McGrattan and E. C. Prescott, “Taxes, Regulations, and the Value of U.S. and U.K. Corporations,” Review of Economic Studies, Vol. 72, No. 3, 2005, pp. 767-796.
[3] S. A. Ross, “The Determination of Financial Structure: The Incentive-Signaling Approach,” Bell Journal of Economics, Vol. 8, No. 1, 1976, pp. 23-40.
[4] E. B. Lindberg and S. A. Ross, “Tobin’s q and Industrial Organization,” Journal of Business, Vol. 54, No. 1, 1981, pp. 1-32.
[5] F. Degeorge, B. Moselle and R. Zeckhauser, “The Ecology of Risk Taking,” Journal of Risk and Uncertainty, Vol. 28, No. 3, 2004, pp. 195-215.
[6] A. J. Auerbach, “Taxation and Corporate Financial Policy,” In :A. J. Auerbach and M. Feldstein, Eds., Handbook of Public Economics, Vol. 3, Elsevier Science, Amsterdam, 2002, pp. 1251-1292.
[7] P. A. Samuelson, “Tax Deductibility of Depreciation to Insure Invariant Valuation,” Journal of Political Economy, Vol. 72, No. 6, 1964, pp. 604-606.
[8] L. H. Summers, “Taxation and Corporate Investment: A q-Theory Approach,” In: W. C. Brainard and G. L. Perry, Eds., Brookings Paper on Economic Activity 1, The Brookings Institution, Washington DC, 1981, pp. 67-127.
[9] K. Kubota, S. Saito and H. Takehara, “Corporate Investment, Interest Tax Shields, Taxation, and Tobin’s q: Business Cycle Analysis of Japanese Industries and Firms,” Journal of Strategic Management Studies, Vol. 4, No. 1-2, 2013, pp. 27-45.
[10] A. Yakita, “Capital Taxation, Tobin’s q and Overlapping Generations,” Japanese Economic Review, Vol. 51, No. 1, 2000, pp. 111-129.
[11] F. Hayashiand T. Inoue, “The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms,” Econometrica, Vol. 59, No. 3, 1991, pp. 731-753.
[12] K. Hori, M. Saito and K. Ando, “What Caused Fixed Investment to Stagnate during the 199s in Japan? Evidence from Panel Data of Listed Companies,” The Japanese Economic Review, Vol. 57, No. 2, 2006, pp. 283-306.
[13] K. H. Chung and S. W. Pruitt, “A Simple Approximation of Tobin’s q,” Financial Management, Vol. 23, 1994, pp. 70-74.
[14] S. B. Perfect and K. W. Wiles, “Alternative Constructions of Tobin’s q: An Empirical Comparison,” Journal of Empirical Finance, Vol. 1, No. 3-4, 1994, pp. 313-341.
[15] T. Erickson and T. M. Whited, “On the Accuracy of Different Measures of Q,” Financial Management, 2006, pp. 5-33.
[16] K. Kubota and H. Takehara, “Changes in Factor Loading across Sectors and Economic Dynamics: Evidence for the Japanese Firms,” 2004.
[17] J. R. Graham, “Debt and the Marginal Tax Rate,” Journal of Financial Economics, Vol. 41, No. 3, 1996, pp. 41-73.
[18] W. F. Brock, “Asset Prices in a Production Economy,” In: J. J. McCall, Ed., The Economics of Information and Uncertainty, University of Chicago Press, Chicago, 1982.
[19] J. C. Cox, J. E. Ingersoll and S. A. Ross, “An Intertemporal General Equilibrium Model of Asset Prices,” Econometrica, Vol. 53, No. 2, 1985, pp. 139-170.
[20] J. Cochrane, “A Cross-Sectional Test of an InvestmentBased Asset Pricing Theory,” Journal of Political Economy, Vol. 104, No. 3, 1996, pp. 572-621.
[21] M. Boldrin, L. J. Christiano and J. D. M. Fisher, “Asset Pricing Lessons for Modeling Business Cycles,” Working Paper, No. 560, Federal Reserve Bank of Minneapolis, 1995.
[22] M. L. Boldrin, L. J. Christiano and J. D. M. Fisher, “Habit Persistence, Asset Returns, and the Business Cycles,” Staff Report, No. 280, Federal Reserve Bank of Minneapolis, 2000.
[23] J. Y. Campbell and L. M. Viceira, “Strategic Asset Allocation,” Oxford University Press, Oxford, 2002.
[24] R. E. Lucas Jr. and E.C. Prescott, “Investment under Uncertainty,” Econometrica, Vol. 39, No. 5, 1971, pp. 659-681.
[25] G. M. Constantinides and M. Scholes, “Optimal Liquidation of Assets in the Presence of Personal Taxes: Implications for Asset Pricing,” Journal of Finance, Vol. 35, No. 2, 1980, pp. 439-449.
[26] M. H. Miller, “Debt and Taxes,” Journal of Finance, Vol. 32, No. 2, 1977, pp. 261-75.
[27] J. R. Graham, “How Big Are the Tax Benefit of Debt?” Journal of Finance, Vol. 55, No. 5, 2000, pp. 1901-1942.
[28] M. T. Leary and M. R. Roberts, “Do Firms Rebalance Their Capital Structures?” Journal of Finance, Vol. 60, No. 6, 2005, pp. 2575-2619.
[29] M. L. Lemmon, M. R. Roberts and J. F. Zender, “Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure,” 2006.
[30] H.-W. Sinn, “Taxation and the Cost of Capital: The ‘Old’ View, the ‘New’ View, and Another View,” In: D. Bradford, Ed., Tax Policy and the Economy, Vol. 5, MIT Press, Massachusetts, 1991, pp. 25-54.
[31] E. R. Arzac and L. G. Glosten, “A Re-Consideration of Tax Shield Valuation,” Mimeo, Graduate School of Business, Columbia University, 2004.
[32] M. Scholes, M. A. Wilson, M. Erickson, E. M. Maydew and T. Shevin, “Taxes and Business Strategy,” 2nd Edition, Prentice Hall, Upper Saddle River, 2002.
[33] M. King and D. Fullerton, “The Taxation of Income from Capital,” The University of Chicago Press, Chicago and London, 1984.
[34] J. G. Cummins, T. S. Harris and K. A. Hasssett, “Accounting Standards, Information Flow, and Firm Investment Behavior,” NBER Working Paper, No. 4685, 1994.
[35] V. Kanniainen and J. Sodersten, “The Importance of Reporting Conventions for the Theory of Taxation,” Journal of Public Economics, Vol. 57, No. 3, 1995, pp. 417-430.
[36] K. Kubota and H. Takehara, “Effect of Tax Rate Changes on the Cost of Capital: The Case of Japanese Firms,” Finanz Archiv/Public Finance Analysis, Vol. 63, No. 2, 2007, pp. 163-185.
[37] E. F. Fama and K. R. French, “Industry Cost of Equity,” Journal of Financial Economics, Vol. 43, No. 2, 1997, pp. 1939-1967.
[38] M. Honma, N. Atoda, F. Hayashi and K. Hata, “Capital Investment and Corporate Taxation (in Japanese),” Research Series No. 41, the Cabinet Ministry of Japan (Formerly Economic Planning Agency), 1984.
[39] J. Mirrlees, “An Exploration in the Theory of Optimal Taxation,” Review of Economic Studies, Vol. 38, No. 2, 1971, pp. 175-208.
[40] R. J. Hodrick and E. C. Prescott, “Post-War US Business Cycles: An Empirical Investigation,” Journal of Money, Credit, and Banking, Vol. 29, No. 1, 1997, pp. 1-16.

comments powered by Disqus

Copyright © 2018 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.