Optimal Investment and Financial Strategies Under Tax Rate Uncertainty
35 Pages Posted: 21 Apr 2010
Date Written: April 2010
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.
Keywords: capital levy, corporate taxation, default risk, real options
JEL Classification: H25
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