Capital Budgeting with Taxes under Uncertainty and Irrevesibility
This article investigates the derivation of post-tax investment rules and neutral tax systems under risk neutrality and risk aversion for irreversible investment projects. Integrating taxes into real option theory, it can be shown that the possible approaches dynamic programming and contingent claims analysis yield identical investment rules under risk neutrality. Under risk aversion, contingent claims analysis requires a sophisticated capital market model which is still missing. In contrast, dynamic programming as an individual approach permits explicit investment rules at least in the pre-tax case. After taxes, both approaches fail to reach general solutions. Nevertheless, we succeed in proving neutral tax systems for the first time under risk aversion in the real option context using dynamic programming.
Volume (Year): 225 (2005)
Issue (Month): 1 (January)
|Contact details of provider:|| Postal: |
Phone: +49 (0)641 99 22 001
Fax: +49 (0)641 99 22 009
Web page: http://wiwi.uni-giessen.de/home/oekonometrie/Jahrbuecher/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
- Kazemi, Hossein B., 1991. "The Multi-Period CAPM and the Valuation of Multi-Period Stochastic Cash Flows," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(02), pages 223-231, June.
- Pennings, Enrico, 2000. "Taxes and stimuli of investment under uncertainty," European Economic Review, Elsevier, vol. 44(2), pages 383-391, February.
- Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
- Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72, pages 604.
- Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
- Süleyman Basak & Mike Gallmeyer, .
"Capital Market Equilibrium with Differential Taxation,"
Rodney L. White Center for Financial Research Working Papers
12-98, Wharton School Rodney L. White Center for Financial Research.
- Suleyman Basak & Michael Gallmeyer, . "Capital Market Equilibrium with Differential Taxation," GSIA Working Papers 1999-E1, Carnegie Mellon University, Tepper School of Business.
- repec:dgr:rugccs:199917 is not listed on IDEAS
- 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 637-54, May-June.
- Harrison, J. Michael & Pliska, Stanley R., 1981. "Martingales and stochastic integrals in the theory of continuous trading," Stochastic Processes and their Applications, Elsevier, vol. 11(3), pages 215-260, August.
- Agliardi, Elettra, 2001. "Taxation and Investment Decisions: A Real Options Approach," Australian Economic Papers, Wiley Blackwell, vol. 40(1), pages 44-55, March.
- Caren Sureth, 2002. "Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach," German Economic Review, Verein für Socialpolitik, vol. 3(2), pages 185-221, 05.
- Niemann, Rainer & Sureth, Caren, 2004. "Tax neutrality under irreversibility and risk aversion," Economics Letters, Elsevier, vol. 84(1), pages 43-47, July.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
- Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, vol. 51(3), pages 611-36, May.
- Fama, Eugene F., 1977. "Risk-adjusted discount rates and capital budgeting under uncertainty," Journal of Financial Economics, Elsevier, vol. 5(1), pages 3-24, August.
- Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
- Moretto, Michele, 2000. "Irreversible investment with uncertainty and strategic behavior," Economic Modelling, Elsevier, vol. 17(4), pages 589-617, December.
- Rainer Niemann, 1999. "Neutral Taxation under Uncertainty - a Real Options Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(1), pages 51-66, March.
When requesting a correction, please mention this item's handle: RePEc:jns:jbstat:v:225:y:2005:i:1:p:77-95. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Winker)
If references are entirely missing, you can add them using this form.