Effects of tax depreciation on optimal firm investments
AbstractThis paper studies how the difference between technical depreciation and tax depreciation affects the firm's optimal investment strategy. The objective is maximization of shareholder value. When tax depreciation differs from technical depreciation, an additional investment not only generates value due to the fact that the firm can produce more, but also due to the fact that an additional deferred tax liability arises. Two types of capital stock will therefore a defect shareholder value, i.e. the replacement value of the assets and the tax base of the assets. We present a dynamic model of the firm with these two types of capital stock, and study the effects of the tax depreciation rate on the firm's optimal dynamic investment strategy, dividend policy, and long run capital stock level.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1999-58.
Date of creation: 1999
Date of revision:
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Web page: http://center.uvt.nl
Tax depreciation; technical depreciation; deferred taxation; investments; shareholder value; dynamic optimization;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-08-15 (All new papers)
- NEP-CDM-1999-08-15 (Collective Decision-Making)
- NEP-FIN-1999-08-15 (Finance)
- NEP-PBE-1999-08-15 (Public Economics)
- NEP-PUB-1999-08-15 (Public Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Corporation tax asymmetries and investment : Evidence from U.K. panel data,"
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- Wakeman, Lee MacDonald, 1980. "Optimal tax depreciation," Journal of Accounting and Economics, Elsevier, vol. 2(3), pages 213-237, December.
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