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The Effect Of The Investment Tax Credit On The Value Of The Firm

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Andrew B. Lyon

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Abstract

A change in the tax law that increases investment incentives for new assets may result in excess returns on new investment, causing firm value to increase. Alternatively, because the investment incentives apply only to new investments, the value of existing assets that compete with these investments may decline. A model is developed in this paper which shows that in general investment incentives have a theoretically ambiguous effect on firm value. Models proposed by Abel (1982), Auerbach and Kotlikoff (1983), and Feldstein (1981) are shown to be special cases of this more general model. Empirical tests examine the changes in firm value to repeated changes of the investment tax credit. Cross-sectional teats find the changes in firm value are positively related to the expected receipt of investment tax credits. No evidence is found to support a relationship between expected changes in the value of a firm's existing assets and changes in firm value.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2537.

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Date of creation: Nov 1989
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Publication status: published as Journal of Public Economics, Vol. 38, No. 2, pp. 227-247, (1989).
Handle: RePEc:nbr:nberwo:2537

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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.:
  1. Mussa, Michael L, 1977. "External and Internal Adjustment Costs and the Theory of Aggregate and Firm Investment," Economica, London School of Economics and Political Science, vol. 44(174), pages 163-78, May. [Downloadable!] (restricted)
  2. Alan J. Auerbach & Lawrence Kotlikoff, 1982. "Investment Versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts," Cowles Foundation Discussion Papers 652, Cowles Foundation, Yale University. [Downloadable!]
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  3. Lawrence H. Summers, 1987. "The Asset Price Approach to the Analysis of Capital Income Taxation," NBER Working Papers 1356, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 61-86, February. [Downloadable!] (restricted)
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  5. Ayres, Frances L., 1987. "An empirical assessment of the effects of the investment tax credit legislation on returns to equity securities," Journal of Accounting and Public Policy, Elsevier, vol. 6(2), pages 115-137. [Downloadable!] (restricted)
  6. Thomas Downs & Patric H. Hendershott, 1987. "Tax Policy and Stock Prices," NBER Working Papers 2094, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321. [Downloadable!] (restricted)
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  1. Andrew B. Lyon, 1989. "Did ACRS Really Cause Stock Prices to Fall?," NBER Working Papers 2990, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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