Optimal Investment and Financial Strategies under Tax Rate Uncertainty
Date
07.05.2010
07.05.2010
Authors
Alessandro Fedele, Paolo M. Panteghini, Sergio Vergalli
JEL Code
H2
H2
Keywords:
Capital Levy, Corporate Taxation, Default Risk, Real Options
Capital Levy, Corporate Taxation, Default Risk, Real Options
Publisher
Economy and Society
Economy and Society
Editor
Fausto Panunzi
Fausto Panunzi
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.