Working Paper: NBER ID: w1553
Authors: Saman Majd; Stewart C. Myers
Abstract: This paper explores the effects of tax asymmetries on the value of risky capital investments made by corporations.The government's claim on the firm is shown to be equivalent to a portfolio of options on the firm's revenues. The tax law's provisions for carrying tax losses forward and backward are introduced, necessitating a numerical solution for the value ofthe government's claim. The results show that asymmetric taxation of operating gains and losses can significantly affect the after-tax net present value of corporate investment opportunities.
Keywords: Taxation; Corporate Finance; Risky Assets; Investment Valuation
JEL Codes: H25; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax asymmetry (H22) | After-tax NPV of corporate investment opportunities (G31) |
| Tax asymmetry (H22) | Investment value (G11) |
| Carry forwards (D25) | Overinvestment by firms with tax losses (H32) |
| Effective tax rate on carry forwards (H26) | Investment decisions (G11) |