Firm Investment, Corporate Finance, and Taxation

Author/Editor:

Geremia Palomba

Publication Date:

December 1, 2002

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2002/237

Subject:

Capital accumulation Corporate income tax Financial institutions Financial services Investment policy Market interest rates National accounts Stocks Taxes

English

Publication Date:

December 1, 2002

ISBN/ISSN:

9781451875720/1018-5941

Stock No:

WPIEA2372002

Pages:

45

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