Optimal Investment and Financial Strategies under Tax Rate Uncertainty
Alessandro Fedele, Paolo M. Panteghini, Sergio Vergalli
Capital Levy, Corporate Taxation, Default Risk, Real Options
Economy and Society
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.