Optimal Investment and Financial Strategies under Tax Rate Uncertainty
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.
Public Finance