Firm Investment, Corporate Finance, and Taxation

46 Pages Posted: 27 Feb 2003

See all articles by Geremia Palomba

Geremia Palomba

International Monetary Fund (IMF); University of Cambridge - Faculty of Economics and Politics

Date Written: December 2002

Abstract

This paper examines the intertemporal effect of corporate income taxation on the investment behavior of a firm that faces imperfect capital markets. It shows that when capital markets are imperfect, the optimizing firm goes through different phases of growth. In this dynamic setting, the effect of a corporate tax on profits varies over time. An increase in the corporate profit tax rate initially reduces investment, but the effect is reversed over time as the firm adjusts its financing policy to the new tax rate.

Keywords: Firm Investment, Imperfect Capital Markets, Corporate Income Taxation

JEL Classification: H22, H25, H32

Suggested Citation

Palomba, Geremia, Firm Investment, Corporate Finance, and Taxation (December 2002). IMF Working Paper No. 02/237, Available at SSRN: https://ssrn.com/abstract=355800 or http://dx.doi.org/10.2139/ssrn.355800

Geremia Palomba (Contact Author)

International Monetary Fund (IMF) ( email )

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University of Cambridge - Faculty of Economics and Politics

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