THE NO-LOSS OFFSET PROVISION AND THE ATTITUDE TOWARDS RISK OF A RISK-NEUTRAL FIRM

This paper examines how discrete tax brackets induce an otherwise risk -neutral firm to behave in a very specific risk-averse manner. We show how the firm's investment decisions relate to various factors, such a s other firm revenue,tax rates, tax exemption levels and project risk. In particular, such a firm is shown to exhibit first-order risk avers ion, with a possible zero demand for a risky investment, even when the expected excess return is positive. Firm behavior displays risk avers ion that is, in some sense, increasing in firm profits at low profit l evels, and decreasing at high profit levels. (C) 1997 Elsevier Science S.A.