Differential Taxation and Corporate Futures-Hedging

Jack E. Wahl and Udo Broll

FinanzArchiv: Public Finance Analysis, 2007, vol. 63, issue 4, 583-590

Abstract: Using a two-moment decision model, this paper analyzes corporate hedging behavior in the presence of differential versus unified income taxation. We start with the well-known result that risk-taking may increase when income tax rates increase and, therefore, the incentive for hedging decreases. We demonstrate that pure hedging is differently affected by taxation from the way speculative hedging is. Analyzing the tax sensitivity of the corporate hedge shows that ahigher risk in the first place may reduce the tax-induced incentive to revise a futures position.

Keywords: differential taxation; hedging; mean-variance model; Roy preference function (search for similar items in EconPapers)
JEL-codes: F21 F31 H20 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (1)

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DOI: 10.1628/001522107X269032

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