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Firm Investment, Corporate Finance, and Taxation
Author:
Mr. Geremia Palomba null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2002: Issue 237
Language:
English
Publication Date:
01 Dec 2002
DOI:
https://doi.org/10.5089/9781451875720.001
ISBN:
9781451875720
ISSN:
1018-5941
Pages:
45
Keywords:
WP; mover accent; tax rate; Firm Investment; Imperfect Capital Markets; Corporate Income Taxation; financing decision; maximization problem; cash flow; decision process; financing policy; co-state variable; investment strategy; A. firm investment; Corporate income tax; Stocks; Investment policy; Capital accumulation; Market interest rates
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund