The effect of debt tax benefits on firm investment decisions
AbstractIn this paper we question the idea that the deduction of debt interest is always an effective policy instrument to spur firm investment. We analyze the investment decision in presence of a borrowing constraint on the amount of the debt that the firm can raise. We show that if the debt interest rate is decreasing in the firm capital accumulation and it is available another financial resource more expensive than debt (at least for levels of debt lower than the upper bound), then the deduction of the debt interest from taxes on capital income may reduce firm investment. This theoretical result should be considered when financial intermediaries are not willing to finance beyond a certain threshold but firms have access to other sources of finance.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 35436.
Date of creation: 17 Dec 2011
Date of revision:
Corporate taxation; Financing constraints; Investment;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
This paper has been announced in the following NEP Reports:
- NEP-ACC-2012-01-03 (Accounting & Auditing)
- NEP-ALL-2012-01-03 (All new papers)
- NEP-PUB-2012-01-03 (Public Finance)
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