Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach

2002 ◽  
Vol 3 (2) ◽  
pp. 185-221 ◽  
Author(s):  
Caren Sureth
Keyword(s):  
Real Option ◽  
Investment Decisions ◽  
Contingent Claims ◽  
Investment Model ◽  
Option Valuation ◽  
Claims Analysis ◽  
The Real ◽  
Contingent Claims Analysis ◽  
Real Option Approach ◽  
Tax Systems

AbstractThe paper applies contingent claims analysis in a real option investment model in order to investigate taxation's influence on investor's decisions under uncertainty. The results show the distortion from realistic-type tax systems, allow to identify a tax-induced paradox in option valuation for specific settings and acknowledge the property of investment neutrality of well-known `ideal' tax systems in the context of different degrees of irreversibility. Furthermore, it is clarified that the idea of risk-neutral valuation cannot be adopted by the real option approach in general.

Capital Budgeting with Taxes under Uncertainty and Irreversibility / Investitionsplanung mit Steuern bei Unsicherheit und Irreversibilität

2005 ◽  
Vol 225 (1) ◽  
Author(s):  
Rainer Niemann ◽  
Caren Sureth
Keyword(s):  
Dynamic Programming ◽  
Risk Aversion ◽  
Real Option ◽  
Capital Budgeting ◽  
Contingent Claims ◽  
Market Model ◽  
Claims Analysis ◽  
Investment Projects ◽  
Contingent Claims Analysis ◽  
Tax Systems

SummaryThis article investigates the derivation of post-tax investment rules and neutral tax systems under risk neutrality and risk aversion for irreversible investment projects. Integrating taxes into real option theory, it can be shown that the possible approaches dynamic programming and contingent claims analysis yield identical investment rules under risk neutrality. Under risk aversion, contingent claims analysis requires a sophisticated capital market model which is still missing. In contrast, dynamic programming as an individual approach permits explicit investment rules at least in the pre-tax case. After taxes, both approaches fail to reach general solutions. Nevertheless, we succeed in proving neutral tax systems for the first time under risk aversion in the real option context using dynamic programming.

THE VALUE OF FIGHTING IRREVERSIBLE DEMISE BY SOFTENING THE IRREVERSIBLE COST

2006 ◽  
Vol 09 (04) ◽  
pp. 503-516 ◽  
Author(s):  
PAUL MAGIS ◽  
ALESSANDRO SBUELZ
Keyword(s):  
Real Options ◽  
Technology Innovation ◽  
Contingent Claims ◽  
Claims Analysis ◽  
Double Barrier ◽  
The Real ◽  
Contingent Claims Analysis

We study a novel issue in the real-options-based technology innovation literature by means of double barrier contingent claims analysis. We show how much a firm with the monopoly over a project is willing to spend in investment technology innovation that softens the irreversible cost of accessing the project before its irreversible demise. The answer depends on the project's characteristics and on the effectiveness demanded from technology innovation.

scholarly journals The Impact of Banking Competition on Firm Credit Risk and Leverage

SAGE Open ◽  
2021 ◽  
Vol 11 (4) ◽  
pp. 215824402110615
Author(s):  
Chengxiao Feng ◽  
Zhubo Li ◽  
Zhen Peng
Keyword(s):  
Default Risk ◽  
Credit Constraints ◽  
Contingent Claims ◽  
Claims Analysis ◽  
Banking Competition ◽  
Leverage Ratio ◽  
Contingent Claims Analysis ◽  
Credit Risks ◽  
Default Risks ◽  
The Impact

A firm’s default risk is closely related to its macrofinancial stability. As financial reform deepens, banking competition may ease firms’ credit constraints, encouraging them to increase their leverage and default risks. This study uses contingent claims analysis to examine firms’ asset–liability ratio and default distance. We find that companies have low leverage and low overall default risks. Moreover, a pro-cyclical effect exists between leverage and economic growth. As banking competition becomes more intense, the default risk decreases, but firms’ leverage ratio rises significantly. The impact is more prominent for highly leveraged firms. Our findings also indicate that utilizing the contingent claims analysis method to measure firms’ leverage and default risks provides more accurate results. Moreover, we provide empirical evidence of the impact of banking competition on firms’ leverage and credit risks. The results suggest that enhancing financial competition has a positive effect on easing credit constraints and reducing default risks.

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