Optimal Investment and Financial Strategies under Tax Rate Uncertainty
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In this paper we apply a real-option model to study the effects of tax rate uncertainty on a firm's decisions. In doing so, we depart from the relevant literature, which focuses on fully equity-financed investment projects. By letting a representative firm borrow optimally, we show that debt finance not only encourages investment activities but can also substantially mitigate the effect of tax rate uncertainty on investment timing.