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Article: Progressive taxation and corporate liquidation policies with mean-reverting earnings

TitleProgressive taxation and corporate liquidation policies with mean-reverting earnings
Authors
KeywordsLiquidation policies
Mean reversion
Progressive taxation
Real options
Issue Date2010
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ecmod
Citation
Economic Modelling, 2010, v. 27 n. 3, p. 730-736 How to Cite?
AbstractThis paper develops a real options model of an all-equity financed firm that receives mean-reverting earnings and is subject to progressive taxation. Tax progression arises from an exogenously given tax exemption threshold such that the firm pays no corporate income taxes should its earnings be less than this threshold. The firm possesses a perpetual option to liquidate its operation for a deterministic salvage value at any time. We show that the firm optimally exercises the liquidation option at the first instant when its earnings reach an endogenously determined threshold (the liquidation trigger) from above. Using numerical analysis, we show that the liquidation trigger is higher or lower than the exogenously given tax exemption threshold, depending on whether the tax exemption is below or above a unique critical level, respectively. We further show that the liquidation trigger is strictly decreasing for all tax exemption thresholds less than the critical level, and can be hump-shaped for all tax exemption thresholds greater than the critical level, especially when the salvage value is small. Corporate income taxes as such are not neutral when tax schedules are progressive. © 2010 Elsevier B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/85713
ISSN
2015 Impact Factor: 0.997
2015 SCImago Journal Rankings: 0.815
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorChu, KCen_HK
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2010-09-06T09:08:19Z-
dc.date.available2010-09-06T09:08:19Z-
dc.date.issued2010en_HK
dc.identifier.citationEconomic Modelling, 2010, v. 27 n. 3, p. 730-736en_HK
dc.identifier.issn0264-9993en_HK
dc.identifier.urihttp://hdl.handle.net/10722/85713-
dc.description.abstractThis paper develops a real options model of an all-equity financed firm that receives mean-reverting earnings and is subject to progressive taxation. Tax progression arises from an exogenously given tax exemption threshold such that the firm pays no corporate income taxes should its earnings be less than this threshold. The firm possesses a perpetual option to liquidate its operation for a deterministic salvage value at any time. We show that the firm optimally exercises the liquidation option at the first instant when its earnings reach an endogenously determined threshold (the liquidation trigger) from above. Using numerical analysis, we show that the liquidation trigger is higher or lower than the exogenously given tax exemption threshold, depending on whether the tax exemption is below or above a unique critical level, respectively. We further show that the liquidation trigger is strictly decreasing for all tax exemption thresholds less than the critical level, and can be hump-shaped for all tax exemption thresholds greater than the critical level, especially when the salvage value is small. Corporate income taxes as such are not neutral when tax schedules are progressive. © 2010 Elsevier B.V. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ecmoden_HK
dc.relation.ispartofEconomic Modellingen_HK
dc.rightsEconomic Modelling. Copyright © Elsevier BV.en_HK
dc.subjectLiquidation policiesen_HK
dc.subjectMean reversionen_HK
dc.subjectProgressive taxationen_HK
dc.subjectReal optionsen_HK
dc.titleProgressive taxation and corporate liquidation policies with mean-reverting earningsen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0264-9993&volume=27&spage=730&epage=736&date=2010&atitle=Progressive+Taxation+and+Corporate+Liquidation+Policies+with+Mean-Reverting+Earningsen_HK
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_HK
dc.identifier.authorityWong, KP=rp01112en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.econmod.2010.01.013en_HK
dc.identifier.scopuseid_2-s2.0-77649185720en_HK
dc.identifier.hkuros169105en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-77649185720&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume27en_HK
dc.identifier.issue3en_HK
dc.identifier.spage730en_HK
dc.identifier.epage736en_HK
dc.identifier.isiWOS:000276289100013-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridChu, KC=35721683500en_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK
dc.identifier.citeulike6624598-

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