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Differential Taxation and Corporate Futures-Hedging

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  • Wahl, Jack E.
  • Broll, Udo
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    Abstract

    Using a two-moment decision model this paper analyzes corporate hedging behavior in the presence of unified and differential income taxation. We start with the well-known result that risk-taking may increase when income tax rates increase and, therefore, the incentive for hedging reduces. We demonstrate that pure hedging is differently affected by taxation than speculative hedging is. Analysing tax-sensitivity of the corporate hedge shows that a higher risk in the first place may reduce the tax-induced incentive to revise a futures position. --

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    File URL: http://econstor.eu/bitstream/10419/22747/1/DDPE200706.pdf
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    Bibliographic Info

    Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 06/07.

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    Date of creation: 2007
    Date of revision:
    Handle: RePEc:zbw:tuddps:0607

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    Postal: 01062 Dresden
    Phone: ++49 351 463 2196
    Fax: ++49 351 463 7739
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    Web page: http://www.tu-dresden.de/wiwi/
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    Related research

    Keywords: taxation; hedging; mean-variance model; unified and differential taxation; Roy preference function;

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    References

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    1. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-58, December.
    2. Kai A. Konrad & Wolfram F. Richter, 1995. "Capital Income Taxation and Risk Spreading with Adverse Selection," Canadian Journal of Economics, Canadian Economics Association, vol. 28(3), pages 617-30, August.
    3. Sinn, Hans-Werner, 1980. "Ökonomische Entscheidungen bei Ungewißheit," Monograph, Mohr Siebeck, Tübingen, edition 1, number urn:isbn:9783169427024, Octomber.
    4. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June.
    5. Sandmo, Agnar, 1989. "Differential taxation and the encouragement of risk-taking," Economics Letters, Elsevier, vol. 31(1), pages 55-59.
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