Taxation, Cost of Capital and Investment: Do Tax Asymmetries Matter?

Giampaolo Arachi () and Federico Biagi ()
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Federico Biagi: University of Padova, Econpubblica and S.D.A., Bocconi University

Giornale degli Economisti, 2005, vol. 64, issue 2-3, 295-322

Abstract: This paper provides new evidence on the effects of taxes on the cost of capital and investment based on panel data of 634 Italian firms for the period 1982-1998. In order to reduce the measurement error of the user cost, tax asymmetries are carefully taken into account by using the Shevlin-Graham methodology to proxy the marginal tax rate. The econometric analysis shows that the user cost (and hence taxes) is a relevant determinant of investment behavior (with an estimated elasticity of investment with respect to the user cost of capital which ranges from -0.199 to -0.217). However the careful modeling of tax asymmetries does not significantly improve the statistical performance of the investment model. Possible explanations are discussed with reference to similar findings in Devereux, Keen and Schiantarelli (1994).

Keywords: corporate taxation; cost of capital; investment; tax asimmetries (search for similar items in EconPapers)
JEL-codes: H32 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (14)

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