IMF Working Papers

Firm Investment, Corporate Finance, and Taxation

By Geremia Palomba

December 1, 2002

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Format: Chicago

Geremia Palomba. "Firm Investment, Corporate Finance, and Taxation", IMF Working Papers 2002, 237 (2002), accessed July 17, 2025, https://doi.org/10.5089/9781451875720.001

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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.

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

Keywords: A. firm investment, Capital accumulation, Cash flow, Corporate income tax, Corporate Income Taxation, Co-state variable, Decision process, Financing decision, Financing policy, Firm Investment, Imperfect Capital Markets, Investment policy, Investment strategy, Market interest rates, Maximization problem, Mover accent, Stocks, Tax rate, WP

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