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Optimal Investment and Financial Strategies under Tax Rate Uncertainty

Author

Listed:
  • Alessandro Fedele
  • Paolo Panteghini
  • Sergio Vergalli

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 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.

Suggested Citation

  • Alessandro Fedele & Paolo Panteghini & Sergio Vergalli, 2010. "Optimal Investment and Financial Strategies under Tax Rate Uncertainty," CESifo Working Paper Series 3017, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3017
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    capital levy; corporate taxation; default risk; real options;

    JEL classification:

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

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