Optimal Investment and Financial Strategies Under Tax Rate Uncertainty

34 Pages Posted: 21 Jun 2010

See all articles by Alessandro Fedele

Alessandro Fedele

Free University of Bozen-Bolzano - Faculty of Economics and Management

Paolo M. Panteghini

University of Brescia; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Sergio Vergalli

University of Brescia - Department of Economics; Fondazione Eni Enrico Mattei (FEEM), Milan

Multiple version iconThere are 2 versions of this paper

Date Written: June 21, 2010

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 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

Suggested Citation

Fedele, Alessandro and Panteghini, Paolo M. and Vergalli, Sergio, Optimal Investment and Financial Strategies Under Tax Rate Uncertainty (June 21, 2010). FEEM Working Paper No. 68.2010. Available at SSRN: https://ssrn.com/abstract=1627989 or http://dx.doi.org/10.2139/ssrn.1627989

Alessandro Fedele

Free University of Bozen-Bolzano - Faculty of Economics and Management ( email )

Via Sernesi 1
39100 Bozen-Bolzano (BZ), Bozen 39100
Italy

Paolo M. Panteghini

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Sergio Vergalli (Contact Author)

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Fondazione Eni Enrico Mattei (FEEM), Milan ( email )

Corso Magenta 63
20123 Milan
Italy

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