Firm Investment, Corporate Finance, and Taxation

Geremia Palomba

No 2002/237, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the intertemporal effect of corporate income taxation on the investment behavior of a firm that faces imperfect capital markets. It shows that when capital markets are imperfect, the optimizing firm goes through different phases of growth. In this dynamic setting, the effect of a corporate tax on profits varies over time. An increase in the corporate profit tax rate initially reduces investment, but the effect is reversed over time as the firm adjusts its financing policy to the new tax rate.

Keywords: WP; mover accent; tax rate; Firm Investment; Imperfect Capital Markets; Corporate Income Taxation; financing decision; maximization problem; cash flow; decision process; financing policy; co-state variable; investment strategy; A. firm investment; Corporate income tax; Stocks; Investment policy; Capital accumulation; Market interest rates (search for similar items in EconPapers)
Pages: 45
Date: 2002-12-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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