Progressive Taxation and Corporate Liquidation: Analysis and Policy Implications

This paper contributes to the debate on alternative corporate tax schemes, employing a rigorous real option methodology which has never been used to study both liquidation policy and taxation. Different tax systems are considered, according to whether the tax regime is progressive or flat and losses are deductible or not. The critical liquidation threshold is derived as a function of interest expenses, the firmÕs driving parameters and the tax rates and taxation brackets. It is shown that only the adoption of a flat tax plan does not interfere with the firmÕs liquidation policy, while any progressive tax schedule can slow down or speed up the closure policy.Corporate debt, default risk, progressive tax, real options.

(S,S)-ADJUSTMENT STRATEGIES AND DYNAMIC HEDGING

We study the destabilising effect of dynamic hedging strategies on the price of the underlying asset in the presence of transaction costs. Once transaction costs are taken into account, continuous portfolio re-hedging is no longer an optimal strategy. Using a non-optimising (local in time) strategy for portfolio rebalancing, explicit dynamics for the price of the underlying asset are derived, focusing in particular on excess volatility and feedback effects of these portfolio insurance strategies. Moreover, it is shown how these latter depend on the heterogeneity of the insured payoffs. Finally, conditions are derived under which it may be still reasonable, from a practical viewpoint, to implement Black-Scholes strategies.

Bank Closure Policies and Capital Requirements: a Note

A bank closure policy problem is analysed in a mathematical model within a Black-Scholes framework where an appropriate notion of capital adequacy is introduced. The value of the deposit insurance liabilities and bank equity are derived. The effects of capital requirements on risk-shifting and bank reorganization are discussed, with a comparison of the impact of the Basel I and II Accords on banks’ behaviour

The fuzzy value of patent litigation under imprecise information

The vague notion of "probabilistic patents" is formalized through a model which combines real option theory and a fuzzy methodology. The imprecise estimates the patent holder possesses about her future profits, the validity and scope of the patent, the litigation costs, the court's decision etc. under a regime of imperfect inforcement of property rights are specified modelling uncertainty with fuzzy sets. Such methodology is embedded within a real option approach, where the value of a patent includes the option value of litigation. We study how the value of a patent is affected by the timing and incidence of litigation. The main results are compared with the empirical findings of previous results

Last Resort Gambles, Risky Debt and Liquidation Policy

This paper develops a real option model in which the interaction between debt, liquidation policy and risky investments is studied. We consider a manager who owns the firm and faces the opportunity to invest in risky pro jects which may bo ost current profits at the cost of bankruptcy if they turn out to be unsuccessful. These investments are "last resort gambles" in the sense that, if successful, they save the company from insolvency, while, if unsuccessful, they make liquidation unavoidable. We show that last resort gamble strategies delay liquidation. We study how the liquidation and the last resort gamble strategies are affected by the firmÕs capital structure.Last resort gambles; risky investments; liquidation policy; real options.

Convertible debt : financing decisions and voluntary conversion under ambiguity

This paper integrates ambiguity into a contingent claim model for convertible debt. We study how convertible debt valuation is affected by the ambiguity biases of equity holders and debt holders and provide sensitivity analysis of the bond value to changes in attitude toward ambiguity, firm and bond parameters. Our result, which are summarized into five main predictions, are consistent with recent empirical evidence and offer a possible interpretation of some corporate finance puzzles

A New Index of Environmental Quality

An optimal weighting scheme is proposed to construct a new index of environmental quality for different countries using an approach that relies on consistent tests for stochastic dominance efficiency. The test statistics and the estimators are computed using mixed integer programming methods. The variables that are considered include countries’ greenhouse emissions, water pollution and forest benefits, as from the dataset of the World Bank. First, the stochastic efficient weighting for each set of variables is calculated to build three sub-indices (for greenhouse emissions, water pollution and land without forests) and then an overall risk index of environmental quality is constructed. One main result is that land without forest contributes the most (with around 70%), greenhouse emissions contribute with around 20% and water pollution contributes less (with around 10%). Finally, countries are ranked according to their index of environmental quality and their rankings are compared with those of the Kyoto Protocol.Environmental Quality; Emissions; Water Pollution; Nonparametric Stochastic Dominance, Mixed Integer Programming

Incentives of stock option based compensation

We introduce explicitly the effort as a choice variable in a continuous time utility maximisation framework of an executive who is partly compensated with stock options. We solve the model in the case where the executive is not allowed to trade in the company’s stock but is able to achieve a partial insurance through trading in a correlated market portfolio. We define the executive’s value of the options through a certainty equivalence approach both in the case of European call options and non-standard capped stock options and study the behaviour of the reservation price as relevant parameters change

On the optimal timing of switching from non-renewable to renewable resources: dirty vs clean energy sources and the relative efficiency of generators

We develop a model on the optimal timing of switching from non-renewable to renewable energy sources with endogenous extraction choices under emission taxes and abatement costs. We assume that non-renewable resources are "dirty" inputs and create environmental degradation, while renewable resources are more environmentally friendly, although they may be more or less productive than the exhaustible resources. The value of the switching option from non-renewable to renewable resources is characterized. Numerical applications show that an increase in emission taxes, abatement costs or demand elasticity slows down the adoption of substitutable renewable resources, while an increase in the natural rate of resource regeneration, the stock of renewable resources or the relative productivity parameter speeds up the investment in the green technology

Rethinking the social market economy : a basic outline

Purpose of this paper is to rethink the Social Market Economy with respect to modern economic and technological structures. In doing so, we explore the limits of the traditional Social Market Economy for solving the economic problems of our time. We find that the Social Market Economy's rigid focus on competitive markets as the corner stone for a decentralized economic order has become outdated and that the basic principle of competition should be extended to decentralized institutions and policies. It is proposed that the preferred choice of specific institutions and policies should reflect their legitimacy, i.e. a combination of their effectiveness and their public acceptance. On the basis of our findings, we propose the amend the principles of the traditional Social Market Economy and to supplement them with additional ones. The principles relate to the economy, to politics, as well as to the uncertainty inherent in the long run future. The proposed principles are illustrated with general examples covering regional economic policy, monetary policy, financial crises, and environmental sustainability