Valuing the Government's Tax Claim on Risky Corporate Assets

53 Pages Posted: 26 Dec 2000 Last revised: 18 May 2001

See all articles by Saman Majd

Saman Majd

University of Pennsylvania Wharton School

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Date Written: February 1985

Abstract

This paper explores the effects of tax asymmetries on the value of risky capital investments made by corporations.The government's claim on the firm is shown to be equivalent to a portfolio of options on the firm's revenues. The tax law's provisions for carrying tax losses forward and backward are introduced, necessitating a numerical solution for the value ofthe government's claim. The results show that asymmetric taxation of operating gains and losses can significantly affect the after-tax net present value of corporate investment opportunities.

Suggested Citation

Majd, Saman and Myers, Stewart C., Valuing the Government's Tax Claim on Risky Corporate Assets (February 1985). NBER Working Paper No. w1553. Available at SSRN: https://ssrn.com/abstract=254521

Saman Majd (Contact Author)

University of Pennsylvania Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Stewart C. Myers

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
Cambridge, MA 02142
United States
617-253-6696 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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