TAXES, FINANCING DECISIONS, AND FIRM VALUE

We use cross-sectional regressions to study how a firm's value is rela ted to dividends and debt. With a good control for profitability, the regressions can measure how the taxation of dividends and debt affects firm value. Simple tax hypotheses say that value is negatively relate d to dividends and positively related to debt. We find the opposite. W e infer that dividends and debt convey information about profitability (expected net cash flows) missed by a wide range of control variables . This information about profitability obscures any tax effects of fin ancing decisions.