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Optimal Investment and Financial Strategies under Tax Rate Uncertainty

Author

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  • Fedele, Alessandro
  • Panteghini, Paolo M.
  • Vergalli, Sergio

Abstract

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.

Suggested Citation

  • Fedele, Alessandro & Panteghini, Paolo M. & Vergalli, Sergio, 2010. "Optimal Investment and Financial Strategies under Tax Rate Uncertainty," Institutions and Markets Papers 91001, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemim:91001
    DOI: 10.22004/ag.econ.91001
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    1. is not listed on IDEAS
    2. Alessandro Fedele & Francesco Liucci & Andrea Mantovani, 2009. "Credit availability in the crisis: the European investment bank group," Working Papers 0913, University of Brescia, Department of Economics.
    3. Unal, Umut, 2015. "Capital Income Taxation and Welfare under DSGE Framework," MPRA Paper 68416, University Library of Munich, Germany.
    4. Martin Meier & Enrico Minelli & Herakles Polemarchakis, 2014. "Competitive markets with private information on both sides," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 257-280, February.
    5. Monica Billio & Roberto Casarin, 2010. "Bayesian Estimation of Stochastic-Transition Markov-Switching Models for Business Cycle Analysis," Working Papers 1002, University of Brescia, Department of Economics.
    6. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.
    7. Alexandra Spaeth, 2025. "The effect of tax policy uncertainty on incentivization, managerial effort and total surplus," Journal of Business Economics, Springer, vol. 95(6), pages 839-869, August.
    8. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
    9. Chen, Wanyi & Jin, Rong, 2023. "Does tax uncertainty affect firm innovation speed?," Technovation, Elsevier, vol. 125(C).
    10. Nicola Comincioli & Paolo M. Panteghini & Sergio Vergalli, 2025. "On the main determinants of startup investment in developing countries," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 42(2), pages 459-477, July.

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    Keywords

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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