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Differential Taxation and Corporate Futures-Hedging


  • Wahl, Jack E.
  • Broll, Udo


Using a two-moment decision model this paper analyzes corporate hedging behavior in the presence of unified and differential income taxation. We start with the well-known result that risk-taking may increase when income tax rates increase and, therefore, the incentive for hedging reduces. We demonstrate that pure hedging is differently affected by taxation than speculative hedging is. Analysing tax-sensitivity of the corporate hedge shows that a higher risk in the first place may reduce the tax-induced incentive to revise a futures position.

Suggested Citation

  • Wahl, Jack E. & Broll, Udo, 2007. "Differential Taxation and Corporate Futures-Hedging," Dresden Discussion Paper Series in Economics 06/07, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
  • Handle: RePEc:zbw:tuddps:0607

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    References listed on IDEAS

    1. Sinn, Hans-Werner, 1980. "Ökonomische Entscheidungen bei Ungewißheit," Monograph, Mohr Siebeck, Tübingen, edition 1, number urn:isbn:9783169427024.
    2. Kai A. Konrad & Wolfram F. Richter, 1995. "Capital Income Taxation and Risk Spreading with Adverse Selection," Canadian Journal of Economics, Canadian Economics Association, vol. 28(3), pages 617-630, August.
    3. Sandmo, Agnar, 1989. "Differential taxation and the encouragement of risk-taking," Economics Letters, Elsevier, vol. 31(1), pages 55-59.
    4. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-430, June.
    5. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
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    Cited by:

    1. Dinkel, Andreas, 2015. "Tax attractiveness and the allocation of risk within multinationals," arqus Discussion Papers in Quantitative Tax Research 189, arqus - Arbeitskreis Quantitative Steuerlehre.

    More about this item


    taxation; hedging; mean-variance model; unified and differential taxation; Roy preference function;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General


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