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Tax Uncertainties And The Investment Decision

Author

Listed:
  • Joseph K. Cheung
  • John Heaney

Abstract

This paper investigates how the firm's investment decision is affected by uncertainties in the tax laws under an asymmetric structure of income taxation. Tax liability is modelled as a call option, and tax uncertainties are modelled as randomness in the exercise price of the call option. The effects on the investment decision are derived by evaluating the comparative statics of the optimal investment level with respect to the volatility of the exercise price. The central result is that the disincentive effects of the tax uncertainties are generally exacerbated under the tax asymmetry.

Suggested Citation

  • Joseph K. Cheung & John Heaney, 1993. "Tax Uncertainties And The Investment Decision," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 20(6), pages 905-910, November.
    • Handle: RePEc:bla:jbfnac:v:20:y:1993:i:6:p:905-910
    DOI: 10.1111/j.1468-5957.1993.tb00301.x
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    References listed on IDEAS

    as
    1. Franks, Julian R & Hodges, Stewart D, 1987. "Lease Valuation When Taxable Earnings Are a Scarce Resource," Journal of Finance, American Finance Association, vol. 42(4), pages 987-1005, September.
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    6. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Cooper, Ian & Franks, Julian R, 1983. "The Interaction of Financing and Investment Decisions When the Firm Has Unused Tax Credits," Journal of Finance, American Finance Association, vol. 38(2), pages 571-583, May.
    9. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    10. Ray Ball & John Bowers, 1983. "Distortions Created by Taxes Which are Options on Value Creation: The Australian Resources Rent Tax Proposal," Australian Journal of Management, Australian School of Business, vol. 8(2), pages 1-14, December.
    11. Halperin, Robert, 1983. "The perceived instability of tax legislation and its effect on consumption-investment decisions," Journal of Accounting and Public Policy, Elsevier, vol. 2(4), pages 239-262.
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