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Optimal Investment And Financial Strategies Under Tax Rate Uncertainty

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Executive Summary

In this paper, the authors apply a real-option model to study the effects of tax rate uncertainty on a firm's decisions. In doing so, they depart from the relevant literature, which focuses on fully equity-financed investment project. By letting a representative firm borrow optimally, they show that debt finance not only encourages investment activities but can also substantially mitigate the effect of tax rate uncertainty on investment timing. Over the last decades, increase in capital mobility has lead to a sharp rise in FDIs and multinational activity, thereby creating the conditions for international tax competition.

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