INVESTMENT IRREVERSIBILITY AND ENDOGENOUS FINANCING: An Evaluation of the Corporate Tax Effects

Miquel Faig and Pauline Shum

Working Papers from University of Toronto, Department of Economics

Abstract: We evaluate the effects of corporate taxation on firms' investment and financing choices. We focus on how the asymmetry of the corporate tax, imperfect loss carry-overs, endogenous financing with credit constraints, and different degrees of investment irreversibility affect both incremental investment and entry decisions. We find that, as long as capital can be financed with debt at the margin, the tax distortions on the marginal investment decision are small. This is particularly so if the technology is flexible. In contrast, the tax distortions on the entry decision are substantial. The ability of firms to carry over their losses and choose their financial structure endogenously are important for reducing both types of distortions.

Keywords: Irreversible investment; corporate finance; assymetric taxation (search for similar items in EconPapers)
JEL-codes: E22 G32 H25 (search for similar items in EconPapers)
Pages: 44 pages
Date: 1997-08-11
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Citations: View citations in EconPapers (1)

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