Graduate School of Industrial Administration, Carnegie-Mellon University and Faculty of Management, Tel Aviv University, respectively. We wish to thank Michael Rothschild, Ivan Brick, and an anonymous referee for helpful comments. Earlier versions of the paper were presented at the Public Economics Workshop of the University of Wisconsin-Madison and at the 1984 Western Finance Association meetings in Vancouver.
The Structure and Incentive Effects of Corporate Tax Liabilities
Article first published online: 30 APR 2012
1985 The American Finance Association
The Journal of Finance
Volume 40, Issue 4, pages 1095–1114, September 1985
How to Cite
GREEN, R. C. and TALMOR, E. (1985), The Structure and Incentive Effects of Corporate Tax Liabilities. The Journal of Finance, 40: 1095–1114. doi: 10.1111/j.1540-6261.1985.tb02365.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper describes situations in which tax liabilities assume the form of a negative position in a call option. This structure motivates an examination of the investment decisions of taxed corporations in the presence of risk. It is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger. These effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders, and under alternative assumptions about the tax code, and about the timing of investment and financing decisions.