Why Some Double Taxation Might Make Sense: The Special Case of Inter-corporate Dividends

Arguments for eliminating the double taxation of dividends apply only to dividends paid by corporations to individuals. The double (and multiple) taxation of dividends paid by one firm to another intercorporate dividends - was explicitly included in the 1930s to eliminate pyramidal corporate groups. These structures exist elsewhere, and are associated with corporate governance problems, corporate tax avoidance, and a greater concentration of economic power than is currently possible in the United States. Current US tax reform proposals do not distinguish dividends paid to individuals from intercorporate dividends and, by eliminating double taxation on both sorts of dividends, may allow pyramidal groups in the US again for the first time since the 1930s.

Corporations

A corporation is an artificial person created for an economic purpose, as described in various aspects of the Theory of the Firm. Recent historical and comparative research shows that corporations in most countries come in groups, each controlled by a single principal. This has implications for various "theories of the firm". The perception that firms ought to be run to maximize shareholder value, though commonplace in financial economics, is also problematic in application.

Behavioral Finance in Corporate Governance-Independent Directors and Non-Executive Chairs

Corporate governance disasters could often be averted had directors asked their CEOs questions, demanded answers, and blown whistles. Work in social psychology by Milgram (1974) and others shows human subjects to have an innate predisposition to obey legitimate authority. This may explain directors’ eerily compliant behavior towards unrestrained CEOs. Other work reveals factors that weaken this disposition to include dissenting peers, conflicting authorities, and distant authorities. This suggests that independent directors, non-executive chairs, and committees composed of independent directors that meets without the CEO might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant. This may reflect measurement problems, in that many apparently independent directors actually have financial or personal ties to their CEOs. It might also reflect other behavioral considerations that reinforce director subservience to CEOs.

Behavioral Finance in Corporate Governance - Independent Directors, Non-Executive Chairs, and the Importance of the Devil’s Advocate

The Common Law, parliamentary democracy, and academia all institutionalize dissent to check undue obedience to authority; and corporate governance reformers advocate the same in boardrooms. Many corporate governance disasters could often be averted if directors asked hard questions, demanded clear answers, and blew whistles. Work by Milgram suggests humans have an innate predisposition to obey authority. This excessive subservience of agent to principal, here dubbed a "type II agency problem", explains directors’ eerie submission. Rational explanations are reviewed, but behavioral explanations appear more complete. Experimental work shows this predisposition disrupted by dissenting peers, conflicting authorities, and distant authorities. Thus, independent directors, chairs, and committees excluding CEOs might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant – perhaps reflecting problems identifying genuinely independent directors.

Family Control and the Rent-Seeking Society

The small number of very large family-controlled corporate groups in many countries combined with their long continuity of control and ability to act discretely give these organizations a comparative advantage in political rent-seeking. This advantage is a key part of a self-reinforcing system whereby oligarchic family corporate control, political rent seeking, and low general levels of trust combine to stymie growth.http://deepblue.lib.umich.edu/bitstream/2027.42/39971/3/wp585.pd

Pension Funding Decisions, Interest Rate Assumptions and Share Prices

This paper explores how unfunded pension obligations affect the market values of firms. Finns appear to choose the interest rate they use in discounting future benefit obligations so as to balance the tax advantages of a low rate against the more healthy looking annual reports a high rate allows. Investors seem to penetrate this ruse and value firms as if obligations were figured at a standard rate. The rate thus used seems to be much lower than current long term interest rates. Pension liabilities are therefore overemphasized by the market. There is also some evidence that pension assets are undervalued. This suggests that growth of the private pension system might increase savings by investors and firms.

Purifying Japan's Banks: Issues and Implications

We use a simple real options framework and empirical data to establish that although Japanese banks hold borrowers’ shares, their interest is more aligned as a contractual claimant than a residual claimant of corporations. We then explain why the Japanese model of corporate governance was useful during the 'catching up' growth of that country's postwar reconstruction decades, but became problematic subsequently. The interests of shareholders, creditors, workers, and managers are more readily aligned because such growth entails investment in known-technology physical capital- intensive projects with highly predictable cash flows. Once on the technological frontier, 'keeping up' growth requires risk taking and a tolerance for 'creative destruction'. This is better accommodated by entrusting corporate governance to firms' true residual claimants, their shareholders.