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Optimal Investment and Financial Strategies under Tax Rate Uncertainty

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  • Alessandro Fedele
  • Paolo Panteghini
  • Sergio Vergalli

Abstract

In this paper we apply a real-option model to study the effects of tax rate uncertainty on a firm's decisions. In doing so, we depart from the relevant literature, which focuses on fully equity-financed investment project. By letting a representative firm borrow optimally, we show that debt finance not only encourages investment activities but can also substantially mitigate the effect of tax rate uncertainty on investment timing.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3017.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3017

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Keywords: capital levy; corporate taxation; default risk; real options;

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Cited by:
  1. Martin Meier & Enrico Minelli & Herakles Polemarchakis, 2014. "Competitive markets with private information on both sides," Economic Theory, Springer, Springer, vol. 55(2), pages 257-280, February.
  2. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
  3. Alessandro Fedele & Francesco Liucci & Andrea Mantovani, 2009. "Credit availability in the crisis: the European investment bank group," Working Papers, University of Brescia, Department of Economics 0913, University of Brescia, Department of Economics.
  4. Monica Billio & Roberto Casarin, 2010. "Bayesian Estimation of Stochastic-Transition Markov-Switching Models for Business Cycle Analysis," Working Papers, University of Brescia, Department of Economics 1002, University of Brescia, Department of Economics.

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