Investment and Divestment Decisions under Uncertainty and Information and Tax Asymmetrie

• Applicant: Professorin Dr. Caren Sureth-Sloane
• Subject Area: Accounting and Finance
• Term: from 2010 to 2016
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 171236984

To continue and enhance the work of the first funding period, we intend to proceed with our investigations on the influence of taxation, especially the asymmetric taxation of profits and losses and capital gains taxation, on investors' willingness to invest or disinvest in a dynamic setting. We focus on three main questions.(1)Existing studies on the effect of capital gains taxation on risky investment timing decisions are based on complex multi-period models, not all of which can be solved analytically. To close this research gap we plan to develop a modified and analytically transparent model that incorporates a split tax rate on current operating profits and capital gains. Using this model, which allows us to mathematically identify the main influencing factors and drivers, we investigate whether and to what extent asymmetric taxation of operating profits and capital gains impacts risky investment and divestment decisions.(2)As a next step, we intend to test whether the theoretical findings on tax-induced investment and divestment effects we obtained in the first funding period also remain valid in an experimental study. Our model's clear and comprehensible design, particularly the experimental reproduction of an economic decision that incorporates a waiting and exit option and depicts uncertainty with a binary random variable, shows considerable potential in terms of gaining further insights.(3)Almost all previous studies on the effects of taxes on investment and liquidation behavior are based upon the assumption that human decision-makers are absolutely rational. However, in numerous experimental studies researchers have shown that test subjects systematically behave irrationally in certain situations. It is hence important to study the influence of taxes on economic decisions under the presumption that cognitive distortions interfere with strict rationality. Instead of applying methods that follow the traditional expected utility theory, we will hence use behavioral economic theory, specifically Prospect Theory, which mathematically depicts psychological elements and irrational behavior, in our planned theroretical study of tax- induced investment effects.We employ new research models and methods and take into account aspects of behavioral economics to yield new insights into the effect of taxes on investment and divestment decisions. These new scientific findings are helpful for both investors and politicians to anticipate the effects of future tax reforms. They can hence help to improve existing tax legislation and add to the debate on how to increase the attractiveness of Germany as an investment location.

• DFG Programme: Research Grants