Irreversible Investment, Financing Choice and Asymmetric Corporate Taxes

Miquel Faig and Pauline Shum

Working Papers from University of Toronto, Department of Economics

Abstract: This paper provides a discrete-time framework for analyzing a firm's investment and financial choices under uncertainty. The investment decision is incremental and subject to a parameterized degree of irreversibility. Corporate taxes are asymmetric, but we allow imperfect carry-forward or carry-back of losses. Personal taxes are also levied. The paper focusses on the impact of various tax rules and corporate borrowing constraints on the firm's choices particularly the desired capital stock. The paper also highlights the effects of depreciation, interest rates, and personal taxes. Numerical simulations complement the analytical results to illustrate when taxes and borrowing constraints matter the most.

Keywords: Irreversible investment; corporate finance; assymetric taxation (search for similar items in EconPapers)
JEL-codes: E2 G3 (search for similar items in EconPapers)
Pages: 44 pages
Date: 1996-05-11
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Citations: View citations in EconPapers (1)

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