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Optimal Investment and Financial Strategies under Tax‐Rate Uncertainty

  • Alessandro Fedele
  • Paolo M. Panteghini
  • Sergio Vergalli

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.

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Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 12 (2011)
Issue (Month): 4 (November)
Pages: 438-468

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Handle: RePEc:bla:germec:v:12:y:2011:i:4:p:438-468
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