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Conference Paper: Taxes, leverage, and stimuli of investment under uncertainty

TitleTaxes, leverage, and stimuli of investment under uncertainty
Authors
KeywordsCapital structure
Investment timing
Real options
Tax-subsidy programs
Issue Date2012
PublisherReal Options Group. The Conference Papers's web site is located at http://www.realoptions.org/papers2012/index.html
Citation
The 16th Annual International Conference on Real Options, London, England, 27-30 June 2012. How to Cite?
AbstractThis paper examines the effect of leverage on the effectiveness of a self-financed tax-subsidy program offered by a government in stimulating a firm’s investment. We show that the firm, be it levered or unlevered, has an incentive to hasten its investment because of the agency conflicts arising from the commitment made by the government on the terms of the tax-subsidy program. We further show that the levered firm has a countervailing incentive to defer its investment due to the deadweight loss when bankruptcy occurs, which would be absent should the firm be unlevered. The former incentive is likely to be dominated by the latter incentive, in particular when the corporate income tax rate is sufficiently high and the bankruptcy cost is sufficiently low so that the firm relies heavily on debt. In this case, the tax-subsidy program induces the levered firm to defer, not hasten, its investment. Finally, we show that the levered firm is made worse off with than without the program because of the presence of agency and bankruptcy costs.
Persistent Identifierhttp://hdl.handle.net/10722/166254

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_US
dc.date.accessioned2012-09-20T08:30:52Z-
dc.date.available2012-09-20T08:30:52Z-
dc.date.issued2012en_US
dc.identifier.citationThe 16th Annual International Conference on Real Options, London, England, 27-30 June 2012.en_US
dc.identifier.urihttp://hdl.handle.net/10722/166254-
dc.description.abstractThis paper examines the effect of leverage on the effectiveness of a self-financed tax-subsidy program offered by a government in stimulating a firm’s investment. We show that the firm, be it levered or unlevered, has an incentive to hasten its investment because of the agency conflicts arising from the commitment made by the government on the terms of the tax-subsidy program. We further show that the levered firm has a countervailing incentive to defer its investment due to the deadweight loss when bankruptcy occurs, which would be absent should the firm be unlevered. The former incentive is likely to be dominated by the latter incentive, in particular when the corporate income tax rate is sufficiently high and the bankruptcy cost is sufficiently low so that the firm relies heavily on debt. In this case, the tax-subsidy program induces the levered firm to defer, not hasten, its investment. Finally, we show that the levered firm is made worse off with than without the program because of the presence of agency and bankruptcy costs.-
dc.languageengen_US
dc.publisherReal Options Group. The Conference Papers's web site is located at http://www.realoptions.org/papers2012/index.html-
dc.relation.ispartofAnnual International Conference on Real Options, 2012en_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectCapital structure-
dc.subjectInvestment timing-
dc.subjectReal options-
dc.subjectTax-subsidy programs-
dc.titleTaxes, leverage, and stimuli of investment under uncertaintyen_US
dc.typeConference_Paperen_US
dc.identifier.emailWong, KP: kpwong@econ.hku.hken_US
dc.identifier.authorityWong, KP=rp01112en_US
dc.description.naturepostprint-
dc.identifier.hkuros207097en_US
dc.customcontrol.immutablesml 130416-

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