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Optimal Investment and Financial Strategies under Tax Rate Uncertainty

  • Alessandro Fedele

    (University of Brescia)

  • Paolo M. Panteghini

    (University of Brescia and CESifo)

  • Sergio Vergalli

    (University of Brescia and FEEM)

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.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.68.

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Date of creation: Jun 2010
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Handle: RePEc:fem:femwpa:2010.68
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