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TAX UNCERTAINTIES AND THE INVESTMENT DECISION
Author(s) -
Cheung Joseph K.,
Heaney John
Publication year - 1993
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1993.tb00301.x
Subject(s) - economics , tax basis , comparative statics , investment (military) , deferred tax , volatility (finance) , microeconomics , tax credit , monetary economics , tax reform , financial economics , state income tax , public economics , gross income , politics , political science , law
This paper investigates how the firm's investment decision is affected by uncertainties in the tax laws under an asymmetric structure of income taxation. Tax liability is modelled as a call option, and tax uncertainties are modelled as randomness in the exercise price of the call option. The effects on the investment decision are derived by evaluating the comparative statics of the optimal investment level with respect to the volatility of the exercise price. The central result is that the disincentive effects of the tax uncertainties are generally exacerbated under the tax asymmetry.