Willingness to Invest and Time Indifference Under Uncertainty and Taxes

Abstract

We analyze the impact of taxation on the option to defer an investment decision and derive tax rates that do not influence the extent of postponement. Furthermore, we deduce from this option pricing framework a measure of an investor's disposition towards realizing an investment project under risk aversion. We show that capital gains taxation often reduces this disposition, whereas asymmetric tax treatment of profits and losses may compensate this effect at least partially. On this basis, we identify indifferent curves that describe tax schedules providing constant disposition to invest. These curves enable a comparison of different tax rules and their impact on investment decisions without explicitly referring to the after-tax value of an investment project. Thereby, the decision-making process is simplified. Our results provide important information for asset pricing that is useful in merger and acquisition processes, especially for determining the value of a firm. We highlight overwhelming importance of integrating taxes in typically applied valuation approaches.

Note: Downloadable document is in German.

Keywords: asymmetrische Besteuerung, Veräußerungsgewinnsteuer, Investitionsentscheidungen, Riskoaversion, Unsicherheit

JEL Classification: H25, G31