Effects of corporate tax rate cuts on firms' investment and valuation: A microsimulation approach

Keiichi Kubota, Hitoshi Takehara

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

This paper investigates changes in firm values triggered by a hypothetical corporate tax rate cut for Japan. We use multiplicative production functions and firms' investment decision changes over time via the accumulated process of retained earnings on the simulated path. We find changes in corporate tax rates can enhance the market value of firm equity in most cases, while there are some cases in which the effects are neutral or even detrimental for firm value. We interpret that these mixed results are caused by joint effects of current provisions of tax loss carry-forward and the net balance of tax deferred accounts. We find that past profitability and variability of each firm is crucial to hit exact threshold points at which firms experience value appreciations or not. The results possess important implications to both regulators and corporate financial managers.

Original languageEnglish
Title of host publicationAdvances in Social Simulation - Proceedings of the 9th Conference of the European Social Simulation Association, ESSA 2013
PublisherSpringer Verlag
Pages155-165
Number of pages11
ISBN (Print)9783642398285
DOIs
Publication statusPublished - 2014 Jan 1
Event9th Conference of the European Social Simulation Association, ESSA 2013 - Warsaw, Poland
Duration: 2013 Sep 162013 Sep 20

Publication series

NameAdvances in Intelligent Systems and Computing
Volume229 AISC
ISSN (Print)2194-5357

Conference

Conference9th Conference of the European Social Simulation Association, ESSA 2013
CountryPoland
CityWarsaw
Period13/9/1613/9/20

    Fingerprint

Keywords

  • Corporate taxation
  • Deferred tax assets and liabilities
  • Earnings variability
  • Retained earnings
  • Tax loss carry-forward

ASJC Scopus subject areas

  • Control and Systems Engineering
  • Computer Science(all)

Cite this

Kubota, K., & Takehara, H. (2014). Effects of corporate tax rate cuts on firms' investment and valuation: A microsimulation approach. In Advances in Social Simulation - Proceedings of the 9th Conference of the European Social Simulation Association, ESSA 2013 (pp. 155-165). (Advances in Intelligent Systems and Computing; Vol. 229 AISC). Springer Verlag. https://doi.org/10.1007/978-3-642-39829-2_14