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Tax Uncertainties And The Investment Decision

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  • 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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