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The Effect of Taxes and Depreciation on Corporate Investment and Financial Leverage

  • Dammon, Robert M
  • Senbet, Lemma W
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    This paper provides a theoretical analysis of the effect of corporate an d personal taxes on the firm's optimal investment and financing decis ions under uncertainty. The results indicate that, when investment is allowed to adjust optimally, increases in investment-related tax shi elds due to changes in the corporate tax code are not necessarily ass ociated with reductions in leverage at the individual firm level, con trary to existing capital structure theory. Cross sectionally, firms with higher investment-related tax shields need not have lower debt-r elated tax shields unless all firms have perfectly correlated pretax cash flows. The implications of the results for empirical analysis ar e also discussed. Copyright 1988 by American Finance Association.

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    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 43 (1988)
    Issue (Month): 2 (June)
    Pages: 357-73

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    Handle: RePEc:bla:jfinan:v:43:y:1988:i:2:p:357-73
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