Does Taxation Induce Risk-Cowardice in the Risk-Neutral Firm?

Posted: 18 Aug 1998

See all articles by Luisa Tibiletti

Luisa Tibiletti

University of Turin - Department of Management

Date Written: July 1998

Abstract

A risk-neutral firm should evaluate the investment policy under uncertainty only on the basis of the expected payoffs. Nevertheless if the consolidated profit is liable to different tax brackets, it could happen that even very small portions of risky projects displaying positive excess returns could be refused. Consequently, taxation may induce a neutral-risk firm to display a sort of risk-averse attitude, which we call, in accordance with a revised definition of Samuelson, "coward" behavior. Conditions guaranteeing non-cowardice in terms of tax brackets and expected after-tax revenues are set out.

JEL Classification: D8, H2

Suggested Citation

Tibiletti, Luisa, Does Taxation Induce Risk-Cowardice in the Risk-Neutral Firm? (July 1998). Available at SSRN: https://ssrn.com/abstract=107011

Luisa Tibiletti (Contact Author)

University of Turin - Department of Management ( email )

C.so Unione Sovietica, 218 bis
Turin, Turin 10100
Italy
39-11-670-6229 (Phone)
39-11-670-6238 (Fax)

HOME PAGE: http://www.management.unito.it/tibiletti

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