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Optimal Investment and Financial Strategies under Tax Rate Uncertainty

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  • Alessandro Fedele

    (University of Brescia)

  • Paolo M. Panteghini

    (University of Brescia and CESifo)

  • Sergio Vergalli

    (University of Brescia and FEEM)

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 projects. 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.

Suggested Citation

  • Alessandro Fedele & Paolo M. Panteghini & Sergio Vergalli, 2010. "Optimal Investment and Financial Strategies under Tax Rate Uncertainty," Working Papers 2010.68, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2010.68
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    Cited by:

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    4. Chen, Wanyi & Jin, Rong, 2023. "Does tax uncertainty affect firm innovation speed?," Technovation, Elsevier, vol. 125(C).
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    7. Alessandro Fedele & Francesco Liucci & Andrea Mantovani, 2009. "Credit availability in the crisis: the European investment bank group," Working Papers 0913, University of Brescia, Department of Economics.

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    More about this item

    Keywords

    Capital Levy; Corporate Taxation; Default Risk; Real Options;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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