Abstract
| Original language | English |
|---|---|
| Pages (from-to) | 1267-1278 |
| Number of pages | 12 |
| Journal | Applied Economics |
| Volume | 46 |
| Issue number | 11 |
| Early online date | 7 Feb 2014 |
| DOIs | |
| Publication status | Published - 2014 |
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Keywords
- contingent-claims model
- default option
- growth option
- investment option
- tax convexity
Cite this
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The effects of tax convexity on default and investment decisions. / LEI, Adrian C.H. ; YICK, Martin H.Y.; LAM, Keith S. K.
In: Applied Economics, Vol. 46, No. 11, 2014, p. 1267-1278.Research output: Journal Publications › Journal Article (refereed)
TY - JOUR
T1 - The effects of tax convexity on default and investment decisions
AU - LEI, Adrian C.H.
AU - YICK, Martin H.Y.
AU - LAM, Keith S. K.
PY - 2014
Y1 - 2014
N2 - 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.
AB - 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.
KW - contingent-claims model
KW - default option
KW - growth option
KW - investment option
KW - tax convexity
UR - http://commons.ln.edu.hk/sw_master/2424
UR - https://www.scopus.com/inward/record.uri?eid=2-s2.0-84893711654&doi=10.1080%2f00036846.2013.870653&partnerID=40&md5=4e437c492429a312bea8b170330d999d
U2 - 10.1080/00036846.2013.870653
DO - 10.1080/00036846.2013.870653
M3 - Journal Article (refereed)
VL - 46
SP - 1267
EP - 1278
JO - Applied Financial Economics
JF - Applied Financial Economics
SN - 0003-6846
IS - 11
ER -