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The effects of tax convexity on default and investment decisions
Keith S.K. Lam1; Adrian C.H. Lei2; Martin H.Y. Yick1
2012
Conference Namethe FMA 2012 Annual Meeting
Source PublicationProceedings of the FMA 2012 Annual Meeting
Conference Date2012-10-17
Conference PlaceAtlanta, USA
Abstract

The objective of this article is to examine how default and investment triggers change under different levels of tax asymmetry when firms face nonlinear tax schedules. Under a convex tax schedule, profits are taxed at a higher rate, while losses are taxed (or rebated) at a lower rate, thus reducing the risk shared by the government. This article presents a dynamic model based on the contingent-claims framework to explore the impacts of tax convexity on the triggers, and we find that the impacts vary significantly depending on several countervailing forces. Tax convexity has a nonmonotonic relationship with both the default and investment triggers, because of the government’s risk-sharing role. The default trigger is higher when tax convexity increases, while the growth option exerts a counteracting effect that lowers this trigger, creating an ambiguity in the investment trigger when changing the level of tax asymmetry.

KeywordContingent-claims Model Tax Convexity Growth Option Default Option Investment Option
DOI10.1080/00036846.2013.870653
Language英语
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Document TypeConference paper
CollectionFaculty of Business Administration
DEPARTMENT OF FINANCE AND BUSINESS ECONOMICS
Affiliation1.Department of Finance and Business Economics, Faculty of Business Administration, University of Macau, Taipa, Macau, China
2.Department of Finance and Insurance, Faculty of Business, Lingnan University, Hong Kong, China
First Author AffilicationFaculty of Business Administration
Recommended Citation
GB/T 7714
Keith S.K. Lam,Adrian C.H. Lei,Martin H.Y. Yick. The effects of tax convexity on default and investment decisions[C],2012.
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