IDEAS home Printed from https://ideas.repec.org/a/kap/jeczfn/v119y2016i2d10.1007_s00712-016-0500-x.html
   My bibliography  Save this article

Accelerated depreciation, default risk and investment decisions

Author

Listed:
  • Paolo M. Panteghini

    () (Università degli Studi di Brescia, CESifo and AccounTax Lab)

  • Sergio Vergalli

    () (Università degli Studi di Brescia and Fondazione Eni Enrico Mattei (FEEM))

Abstract

Abstract In this article we focus on a representative firm that can decide when to invest under default risk. On the one hand, this firm can benefit from generous tax depreciation allowances, on the other hand it faces a default risk. Our aim is to study the effects of tax depreciation allowances in a risky environment. As will be shown in our numerical analysis, generous tax depreciation allowances lead to a decrease in a firm’s leverage and, in most cases, cause a reduction in default risk. This result has a strong policy implication, in that it shows that an investment stimulus pack is expected neither to increase the default risk nor to cause financial instability.

Suggested Citation

  • Paolo M. Panteghini & Sergio Vergalli, 2016. "Accelerated depreciation, default risk and investment decisions," Journal of Economics, Springer, vol. 119(2), pages 113-130, October.
  • Handle: RePEc:kap:jeczfn:v:119:y:2016:i:2:d:10.1007_s00712-016-0500-x
    DOI: 10.1007/s00712-016-0500-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00712-016-0500-x
    File Function: Abstract
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Thomas Gries & Ulrich Prior & Caren Sureth, 2012. "A Tax Paradox for Investment Decisions under Uncertainty," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 14(3), pages 521-545, June.
    4. Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    5. Panteghini, Paolo M., 2006. "S-based taxation under default risk," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1923-1937, November.
    6. Paolo M. Panteghini & Michele Moretto, 2007. "Preemption, Start-Up Decisions and the Firms' Capital Structure," Economics Bulletin, AccessEcon, vol. 4(39), pages 1-14.
    7. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, June.
    8. Jianjun Miao, 2005. "Optimal Capital Structure and Industry Dynamics," Journal of Finance, American Finance Association, vol. 60(6), pages 2621-2659, December.
    9. repec:ebl:ecbull:v:4:y:2007:i:39:p:1-14 is not listed on IDEAS
    10. Niemann Rainer & Sureth Caren, 2005. "Capital Budgeting with Taxes under Uncertainty and Irreversibility / Investitionsplanung mit Steuern bei Unsicherheit und Irreversibilität," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 225(1), pages 77-95, February.
    11. Michael Keen & Alexander Klemm & Victoria Perry, 2010. "Tax and the Crisis," Fiscal Studies, Institute for Fiscal Studies, vol. 31(1), pages 43-79, March.
    12. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    13. Mauer, David C. & Sarkar, Sudipto, 2005. "Real options, agency conflicts, and optimal capital structure," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1405-1428, June.
    14. Danielova, Anna & Sarkar, Sudipto, 2011. "The effect of leverage on the tax-cut versus investment-subsidy argument," Review of Financial Economics, Elsevier, vol. 20(4), pages 123-129.
    15. Brennan, M J & Schwartz, Eduardo S, 1977. "Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion," Journal of Finance, American Finance Association, vol. 32(5), pages 1699-1715, December.
    16. Rainer Niemann, 1999. "Neutral Taxation under Uncertainty - a Real Options Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(1), pages 51-66, March.
    17. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    18. Harjoat S. Bhamra & Lars-Alexander Kuehn & Ilya A. Strebulaev, 2010. "The Levered Equity Risk Premium and Credit Spreads: A Unified Framework," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 645-703, February.
    19. Mauer, David C. & Ott, Steven H., 1995. "Investment under Uncertainty: The Case of Replacement Investment Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(04), pages 581-605, December.
    20. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-349, June.
    21. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Giacomo Corneo & Sergio Vergalli, 2016. "Taxes, subsidies, regulation in dynamic models," Journal of Economics, Springer, vol. 119(2), pages 97-99, October.

    More about this item

    Keywords

    Capital structure; Contingent claims; Corporate taxation and investment;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jeczfn:v:119:y:2016:i:2:d:10.1007_s00712-016-0500-x. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.