Optimal Investment and Financial Strategies Under Tax Rate Uncertainty
34 Pages Posted: 21 Jun 2010
Date Written: June 21, 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 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.
Keywords: Capital Levy, Corporate Taxation, Default Risk, Real Options
JEL Classification: H2
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