Working Paper

Optimal Investment and Financial Strategies under Tax Rate Uncertainty

Alessandro Fedele, Paolo Panteghini, Sergio Vergalli
CESifo, Munich, 2010

CESifo Working Paper No. 3017

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 project. 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.

CESifo Category
Public Finance
Keywords: capital levy, corporate taxation, default risk, real options
JEL Classification: H250