The Effect on a Firm's Financing and Investment Decisions of Differential Taxation as Barriers to International Investment

Jong Cook Byun and Son-Nan Chen

Review of Quantitative Finance and Accounting, 1997, vol. 8, issue 3, 209 pages

Abstract: The effect of barriers to international investment (in the form of differential taxation) upon a firm's investment and financing decision is analyzed through a newly derived international capital asset pricing model. A firm using an improper project selection criterion which fails to account for the effect of barriers to international investment may reject a desirable project with high systematic risk, whereas it may incorrectly accept an undesirable project with low systematic risk. The financial risk premium under barriers is greater than that in the absence of barriers to international investment. In addition, the lower is the degree of barriers to international investment, the more domestic securities will gain, even when both countries impose a tax on investors of different nationality. Copyright 1997 by Kluwer Academic Publishers

Date: 1997
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