Firm Investment, Corporate Finance, and Taxation
December 1, 2002
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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, co-state variable, Corporate income tax, Corporate Income Taxation, 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
Pages:
45
Volume:
2002
DOI:
Issue:
237
Series:
Working Paper No. 2002/237
Stock No:
WPIEA2372002
ISBN:
9781451875720
ISSN:
1018-5941
