| In their celebrated papers,Modigliani and Miller (1958,1963) argued that the capital structure decision and dividend policy is a matter of irrelevance,affecting neither the value of corporation nor it's cost of capital. Their theories are founded on a series of assumptions,such as homogeneous expectation;symmetric information;and perfect market. In a perfect market there is not tax at all,but in the modern society,taxation is inevitability obligation for every individual and firm. Many scholars in foreign countries devoted themselves to the issue on how taxation affects the corporate financial decisions. They have conducted a lot of theoretical studies and empirical analyses,and put forward various theories with different ideas. However,little research on this problem has been done in China so far. It is known that there exist many differences in taxation between China and other countries mentioned in the previous study,therefore,my paper try to perform a theoretical study about the question how taxation in China affects the corporate financial policies. I hope this paper can provide some insights on the choice of firm's financial policies and the reform of government's taxation system.Based on the specific tax system in China,the article focuses on the tax effect on corporate financial policies. It's divided into four parts.In the first section,the paper reviews a great deal of relevant literature documented in journals home and abroad. In addition,this section makes an overall comprehensive analysis of and comments on the theories in the field of the tax effect on financial policies,then,summarizes the general development of the theories,and finds out the latest development of the research. The aims and the main contributions of this paper are listed at the end of this section.In the second section,the paper probes how taxation affects the pricing ofcapital asset. On the basis of the review of the capital asset pricing model,Brennan (1970) modei on after-tax capital asset pricing theory is introduced. Then,I establish an after-tax capital asset pricing model based on specific taxation in China. The theory in the section lays the foundation of the proof of the theory in the next two sections,which discuss the tax effects on capital structure and dividend policy.In the third section,I examine tax effect on corporate capital structure decisions. After a summary of MM irrelevant theory,I study how the corporate income taxes,personal income tax and capital gains tax affect the value of the firm. At the end of this section,I formulate a state preference general equilibrium model about tax effect on the corporate capital structure decisions on a basis of the taxation in China.The last section is concerned with tax effect on dividend policy. Firstly,I probe into the nature of the corporate dividend policy. Then,how the corporate income taxes,personal income tax and capital gains tax affect the corporate dividend policy are considered interactively in the study. A general equilibrium model about tax effect on the corporate dividend policy is constructed at the end of this section.The main contributions of this paper are as follows:1. Why the stated-owned enterprises in China tend to use higher leverage and why the listed companies dislike pay cash dividends to their shareholders,which are two hot topics around China. Many researchers have advanced all sorts of reasons separately. But the taxation is not included. In fact,these two problems are both relative to taxation. Based on our taxation,this paper formulates how taxation affects the corporate financial policies. From the perspective of taxation,the .paper explains why the firms in China tend to use higher financial leverage and why listed companies dislike distributing cash dividend. Hopefully,the insight provided will fill an important gap in our understanding of this importantissue.2. In the second section,under the assumptions:(1) all individuals are taxed at the same proportional rate;(2) capital gains and dividends are...
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