Irreversible investment and endogenous financing: An evaluation of the corporate tax effects

We evaluate the effects of corporate taxation on firms' investment and fina ncing choices. We focus on how the asymmetry of the corporate tax, imperfec t loss carry-overs, endogenous financing with credit constraints, and diffe rent degrees of investment irreversibility affect both incremental investme nt and entry decisions. We fmd that, as long as capital can be financed wit h debt at the margin, the tax distortions on the marginal investment decisi on are small. This is particularly so if the technology is flexible. In con trast, the tax distortions on the entry decision are substantial. The abili ty of firms to carry over their losses and choose their financial structure endogenously are important for reducing both types of distortions. (C) 199 9 Elsevier Science B.V. All rights reserved. JEL classification: E2; G3; H2 .