The Decline in Aggregate Share Values: Inflation, Taxation, Risk and Profitability

28 Pages Posted: 6 Jul 2004 Last revised: 8 Jul 2010

See all articles by Patric H. Hendershott

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Date Written: July 1979

Abstract

With a neutral tax system an increase in observed and anticipated inflation would not be expected to alter either real after-tax yields on bonds and equities or the ratio of the market value of equities to the replacement cost of corporate real capital. In the real world, however, declines in real after-tax bond yields and the relative value of shares have been observed. Feldstein (1976, 1978) has attributed both of these phenonema to the use of historic-cost depreciation, and the taxation of nominal capital gains. Our analysis supports his conjecture regarding the decline in real after-tax debt yields, but rejects his analysis of the cause of the decline in share values. The decline in share values can be attributed to many factors, but the most important is probably the favorable taxation of income from owner-occupied housing (no taxation of either implicit rents nor real capital gains). As a result housing has become more attractive with the acceleration of inflation, and households have substituted housing for equity shares. Other possible sources of the decline in share values are reduced profitability of existing capital, owing to increased regulatory costs and real energy prices, and a greater perceived risk in business operations.

Suggested Citation

Hendershott, Patric H., The Decline in Aggregate Share Values: Inflation, Taxation, Risk and Profitability (July 1979). NBER Working Paper No. w0370, Available at SSRN: https://ssrn.com/abstract=261223

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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