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Optimal Investment and Financial Strategies under Tax Rate Uncertainty

  • Alessandro Fedele
  • Paolo 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 project. 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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-04/cesifo1_wp3017.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3017.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3017
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