Taxes and Corporate Investment Decisions

Companies work hard and put their best possible efforts in an attempt to optimize their tax liabilities. This not only helps them in making safe financial decisions but also maximizes firm value. Investment decisions have a substantial impact on corporate valuation as they influence corporate growth. Value enhancement has been central to financial management though, taxation strategies carry a distorting effect as to corporate investment and financing decisions.

Investment plans rely on taxation strategies for the most part. As corporate taxes apply to the companies’ profits, hence, the after-tax profits determine the amount and the avenues of investments and the way investment planning shall be carried out.

Moreover, investments call for ample cash flows generated internally. While it is sure that internal cash flows are affected mainly by the corporate taxes applied. Clearly, firms cut investments when they are giving more in taxes. This is particularly true when the capital markets are in such conditions as they greatly lean on internal investment sources.

There are several independent opinions of experts about the relationship between taxes and investments. The most worthwhile being the use of debt financing to make any investment. This has manifold benefits. First, the managers in a particular company tend to invest more sensibly because the funds have been borrowed and are under the supervision of a financing institution. Second, the shareholders are also at ease because of the supervision of a third-party financier. Third, the borrowed funds that are invested more often result in the value maximization for the shareholders because of prudently choosing what projects to invest in. Finally, the most important benefit is that the use of debt results in reduced corporate taxes as the interest paid on a debt has a trickle-down effect on corporate profits (Princen, 2012).

Reference

Princen, S. (2012). Determining the impact of taxation on corporate financial decisionmaking. Reflets Et Perspectives De La Vie économique, LI(3), 161. https://doi.org/10.3917/rpve.513.0161