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Optimal Investment and Financial Strategies under Tax Rate Uncertainty

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  • 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.
    • Handle: RePEc:ces:ceswps:_3017
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    Cited by:

    1. Alessandro Fedele & Francesco Liucci & Andrea Mantovani, 2009. "Credit availability in the crisis: the European investment bank group," Working Papers 0913, University of Brescia, Department of Economics.
    2. Unal, Umut, 2015. "Capital Income Taxation and Welfare under DSGE Framework," MPRA Paper 68416, University Library of Munich, Germany.
    3. Martin Meier & Enrico Minelli & Herakles Polemarchakis, 2014. "Competitive markets with private information on both sides," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 257-280, February.
    4. Monica Billio & Roberto Casarin, 2010. "Bayesian Estimation of Stochastic-Transition Markov-Switching Models for Business Cycle Analysis," Working Papers 1002, University of Brescia, Department of Economics.
    5. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.
    6. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
    7. Chen, Wanyi & Jin, Rong, 2023. "Does tax uncertainty affect firm innovation speed?," Technovation, Elsevier, vol. 125(C).

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    More about this item

    Keywords

    capital levy; corporate taxation; default risk; real options;
    All these keywords.

    JEL classification:

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

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