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The effect of the investment tax credit on the value of the firm

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  • Lyon, Andrew B.

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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Suggested Citation

  • Lyon, Andrew B., 1989. "The effect of the investment tax credit on the value of the firm," Journal of Public Economics, Elsevier, vol. 38(2), pages 227-247, March.
  • Handle: RePEc:eee:pubeco:v:38:y:1989:i:2:p:227-247
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    References listed on IDEAS

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    1. Alan J. Auerbach & Laurence J. Kotlikoff, 1982. "Investment versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts," NBER Working Papers 1027, National Bureau of Economic Research, Inc.
    2. Lawrence H. Summers, 1984. "The Asset Price Approach to the Analysis of Capital Income Taxation," NBER Working Papers 1356, National Bureau of Economic Research, Inc.
    3. Auerbach, Alan J, 1989. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 939-962, November.
    4. 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 163-178, May.
    5. Rosanne Altshuler & Alan J. Auerbach, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 61-86.
    6. Alan J. Auerbach & James R. Hines, Jr., 1987. "Anticipated Tax Changes and the Timing of Investment," NBER Chapters,in: Taxes and Capital Formation, pages 85-88 National Bureau of Economic Research, Inc.
    7. Thomas Downs & Patric H. Hendershott, 1986. "Tax Policy and Stock Prices," NBER Working Papers 2094, National Bureau of Economic Research, Inc.
    8. 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.
    9. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321.
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    Cited by:

    1. Carola Frydman & Dimitris Papanikolaou, 2015. "In Search of Ideas: Technological Innovation and Executive Pay Inequality," NBER Working Papers 21795, National Bureau of Economic Research, Inc.
    2. repec:spr:chfecr:v:4:y:2016:i:1:d:10.1186_s40589-016-0040-0 is not listed on IDEAS
    3. William N. Evans & Jeanne S. Ringel & Diana Stech, 1999. "Tobacco Taxes and Public Policy to Discourage Smoking," NBER Chapters,in: Tax Policy and the Economy, Volume 13, pages 1-56 National Bureau of Economic Research, Inc.
    4. Smith Loren K., 2009. "New Market Policy Effects on Used Markets: Theory and Evidence," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-27, July.
    5. Andrew B. Lyon, 1989. "Did ACRS Really Cause Stock Prices to Fall?," NBER Working Papers 2990, National Bureau of Economic Research, Inc.
    6. Lamdin, Douglas J., 2001. "Implementing and interpreting event studies of regulatory changes," Journal of Economics and Business, Elsevier, vol. 53(2-3), pages 171-183.
    7. Joel B. Slemrod, 1992. "The Impact of U.S. Tax Reform on Canadian Stock Prices," NBER Chapters,in: Canada-U.S. Tax Comparisons, pages 237-254 National Bureau of Economic Research, Inc.

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