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Optimal Investment and Financial Strategies under Tax Rate Uncertainty

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  • Fedele, Alessandro
  • Panteghini, Paolo M.
  • Vergalli, Sergio

Abstract

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 projects. 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.

Suggested Citation

  • Fedele, Alessandro & Panteghini, Paolo M. & Vergalli, Sergio, 2010. "Optimal Investment and Financial Strategies under Tax Rate Uncertainty," Institutions and Markets Papers 91001, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemim:91001
    DOI: 10.22004/ag.econ.91001
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    Keywords

    Financial Economics;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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