Taxes, Leverage, and Stimuli of Investment under Uncertainty
نویسنده
چکیده
This paper examines the effect of leverage on the effectiveness of a self-financed taxsubsidy program offered by a government in stimulating a firm’s investment. We show that the firm, be it levered or unlevered, has an incentive to hasten its investment because of the agency conflicts arising from the commitment made by the government on the terms of the tax-subsidy program. We further show that the levered firm has a countervailing incentive to defer its investment due to the deadweight loss when bankruptcy occurs, which would be absent should the firm be unlevered. The former incentive is likely to be dominated by the latter incentive, in particular when the corporate income tax rate is sufficiently high and the bankruptcy cost is sufficiently low so that the firm relies heavily on debt. In this case, the tax-subsidy program induces the levered firm to defer, not hasten, its investment. Finally, we show that the levered firm is made worse off with than without the program because of the presence of agency and bankruptcy costs. JEL classification: G31; G33; H25
منابع مشابه
The Effect Of Salvage Market On Strategic Technology Choice And Capacity Investment Decision Of Firm Under Demand Uncertainty
متن کامل
Regulating Externalities with Uncertainty, Investment, and Technology Spillovers
This paper analyzes optimal and non-optimal regulation of environmental externalities with investment in technology and uncertainty about the severity of environmental damages. Investment creates the potential for technology spillovers so that optimal regulation must address externalities from both emissions and investment. Despite these multiple externalities and uncertainty, we show that an o...
متن کاملAnalysis of Financial Leverage, Operating Leverage and Capital Venture Effect on Tobin's Q Ratio of Investment and Holding Companies Listed in Tehran Stock Exchange
The main purpose of this research is the study on effect of Financial and Operating Leverage and Venture Capital on Tobin's Q ratio amongst companies listed in Tehran Stock Exchange. In this research, the Holdings and Investment companies are used as statistical samples and 73 enterprises that are listed in Tehran Stock Exchange within 2001 to 2016 have been studied. The results driven by this ...
متن کاملThe Impact of Leverage on Firm Investment: Evidence from Tehran Stock Exchange
The impact of financial leverage on firm investment is one of the most important issues in corporate finance. Debt overhang reduces the incentives of shareholder–management coalition in controlling the firm to invest in positive net-present-value investment opportunities. On the other hand, firms without debt in their financial structure face with a new problem known as over-investment. T...
متن کاملOn the Investment Sensitivity of Debt under Uncertainty
We investigate the impact of debt on a panel of U.S. manufacturing firms’ capital investment behavior as the underlying firm-specific and market-level uncertainty changes. Our estimates show that the influence of leverage on capital investment may be stimulating or mitigating depending on the effects of uncertainty.
متن کامل