William M. Gentry

Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA

Abstract This paper examines industry-level exchange rate exposures for Canada, Japan, and the USA. Measuring exposure by adding the change in the exchange rate to the domestic market model of industry portfolio returns, some industries in all three countries display significant exposures. Moreover, for each country, the exchange rate is important for explaining industry returns at the economy-wide level. To explore whether exchange rate exposures are systematically linked to the activities of the industries, we model exposure as a function of industry characteristics. For all three countries, the relation between exposure and industry characteristics is broadly consistent with economic theory. (JEL F3)

Entrepreneurship and Household Saving

Abstract Using data from the 1983 and 1989 Federal Reserve Board Surveys of Consumer Finances, we quantify three findings about entrepreneurial saving decisions and their role in household wealth accumulation. First, entrepreneurial households own a substantial share of household wealth and income, and this share increases throughout the wealth distribution and the income distribution. Second, the portfolios of entrepreneurial households, even wealthy ones, are very undiversified, with the bulk of assets held within active businesses. Third, wealth-income ratios and saving rates are higher for entrepreneurial households even after controlling for age and other demographic variables. Taken together, these findings suggest that studies of household saving decisions in general and of the savings decisions of wealthy or high-income households in particular have paid insufficient attention to the role of entrepreneurial decisions and their role in wealth accumulation.

Taxes, financial decisions and organizational form : Evidence from publicly traded partnerships

Abstract Publicly Traded Partnerships (PTPs), also known as Master Limited Partnerships, are similar to U.S. corporations, yet they are not subject to corporate taxes. Given their mixture of corporate and partnership characteristics, PTPs provide an experiment for studying taxation and firm financial decisions. This paper compares the financial structure and dividend policies of PTPs and corporations in the oil and gas exploration industry. The results are consistent with hypotheses about taxes and financial decisions: controlling for other factors, PTPs pay more dividends and borrow less than similar corporations.

Debt, investment and endowment accumulation: the case of not-for-profit hospitals

Not-for-profit hospitals benefit from special tax rules that allow state authorities to issue tax-exempt bonds on their behalf, which may affect their investment and financing choices. Hospitals may respond by increasing their investment in physical assets; however, they may also engage in tax arbitrage by using the tax-exempt debt while maintaining endowment assets. The paper combines data from tax (information) returns and the annual survey of hospitals by the American Hospital Association for 1993-1996. Overall, the results are consistent with substantial tax planning by not-for-profit hospitals. Of the US

Capital Gains Taxation and Realizations: Evidence from Interstate Comparisons

55.9 billion in tax-exempt liabilities of hospitals in 1996, as much as US

Enhancing Retirement Security Through the Tax Code: The Efficacy of Tax-Based Subsidies in Life Annuity Markets

32.6 billion could have been eliminated if hospitals spent their endowments instead of borrowing. Furthermore, controlling for hospital size (in terms of revenues and operating assets), endowment assets are associated with a higher ratio of tax-exempt (or total) debt to operating assets. In contrast, endowment assets are not related to taxable debt suggesting that the effects of the endowment on borrowing are motivated by tax incentives. Investment and endowment accumulation regressions suggest that increases in debt increase both physical investment and endowment accumulation but these effects are concentrated among cash-rich hospitals for which the effects on endowment accumulation effects are larger than the effects on physical investment.

What Can We Learn about Investment and Capital Structure with a Better Measure of q

Despite numerous studies of the relation between income taxes and capital garns realizations, the revenue consequences of reducing capital gains tax rates remain unclear. However, an important source of cross-sectional variation has been neglected in this line of research: since both the tax base and the tax rate vary among states, the marginal tax rate on capital gains differs among otherwise identical individuals located in different states. The interstate variation in the tax consequences of realizing capital gains implies that the incentive to realize gains varies across states. This paper documents the interstate variation in capital gains taxation and examines the relation between capital gains taxes and aggregated state-level realizations. For each state, we construct marginal tax rates on capital gains for the highest state income tax bracket for 1982 through 1990. Using state-level aggregated data rather than data on individual taxpayers alleviates the problem that the marginal tax rate is endogenous to the amount of capital gains realized. Panel estimates indicate that capital gains realizations are negatively related to capital gains tax rates. The estimated elasticity is smaller than that found by most researchers using panel data, with a point estimate of - 0.67 in our basic specification.

Understanding Spatial Variation in Tax Sheltering: The Role of Demographics, Ideology, and Taxes

The under-development of existing annuity markets coupled with the secular trend away from traditional pensions towards defined contribution accounts in the U.S. raises significant concerns about the adequacy of retirement income for future retirees. We develop dynamic programming techniques to evaluate the efficacy of policies designed to address this concern by encouraging annuitization. Our analysis suggests that policies providing monetary incentives through the tax code can indeed significantly enhance annuitization among retirees: our central estimates suggest that tax-exemption based policies which have been recently proposed in Congress have the potential to increase annuitization by as much as

Tax Policy and Entrepreneurial Entry

50,000 for each retired household, at a relatively modest revenue cost to the government. Similar sized policies based instead on refundable tax credits may be more desirable from both efficiency and distributional perspectives.

DISTRIBUTIONAL IMPLICATIONS OF INTRODUCING A BROAD-BASED CONSUMPTION TAX

This paper takes an integrated approach to examining the link between stock prices, investment, and capital structure decisions using data on a unique type of firm: Real Estate Investment Trusts (REITs). By using REITs, we are able to obtain high quality estimates of the net asset value of the firm, that can be used to create relatively accurate measures of Tobins q. In addition, REITs have institutional features that allow us to abstract from other factors that have complicated previous studies. We have three main findings. First, while REIT investment is weakly related to the traditional measure of q, it is quite responsive to an alternative measure of q based on NAV. A REIT whose NAV-based q ratio rises from 1.0 to 1.1 will increase its assets by ten percent in the next year. Second, the debt-to-value ratio responds to deviations in price-to-NAV ratio as well, but more sluggishly. A 0.1 increase in price-to-NAV ratio leads to a relatively modest 0.52 percentage point decrease in the following years debt-to-market-value ratio. Overall, REITs appear to finance marginal projects with a mix of debt and equity that is similar to their average debt-equity mix. Third, we find evidence that these relationships are nonlinear. Firms invest aggressively when q exceeds one, but do not dis-invest when q is below one. The investment results support traditional theories of firm investment with adjustment costs and imply that past difficulties in validating q theory are likely due to problems in adequately measuring q. The nonlinear relationship between investment and q is consistent with relatively high costs of disinvestment, but also agency models in which managers are reluctant to shrink the size of the firm. Finally, the evidence is weakly consistent with REIT managers attempting a limited amount of financial market timing based on quasi-public information on NAV.