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Accelerated Depreciation, Default Risk and Investment Decisions

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  • Panteghini, Paolo M.
  • Vergalli, Sergio

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

  • Panteghini, Paolo M. & Vergalli, Sergio, "undated". "Accelerated Depreciation, Default Risk and Investment Decisions," ETA: Economic Theory and Applications 232220, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemth:232220
    DOI: 10.22004/ag.econ.232220
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    File URL: https://ageconsearch.umn.edu/record/232220/files/NDL2016-014.pdf
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    Cited by:

    1. Tang, Meili & Wang, Yu, 2022. "Tax incentives and corporate social responsibility: The role of cash savings from accelerated depreciation policy," Economic Modelling, Elsevier, vol. 116(C).
    2. Nicola Comincioli & Paolo M. Panteghini & Sergio Vergalli, 2021. "Welfare effects of business taxation under default risk," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1412-1429, December.
    3. Wang, Jiangyuan & Fan, Wenlin & Wang, Zhixiao, 2024. "Tax incentives and earnings management: A study based on accelerated depreciation policy in China," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 281-296.
    4. Zeng, Jing & Luo, Gaoling & Wu, Jun, 2025. "Accelerated depreciation tax policy for fixed assets and IPO underpricing: Evidence from China," Finance Research Letters, Elsevier, vol. 78(C).
    5. Yingjie Niu & Jinqiang Yang & Siqi Zhao, 2022. "Robust stimulus of private investment: Tax rate cut or investment subsidy?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(3), pages 339-357, September.
    6. Giacomo Corneo & Sergio Vergalli, 2016. "Taxes, subsidies, regulation in dynamic models," Journal of Economics, Springer, vol. 119(2), pages 97-99, October.
    7. Cristian Carini & Michele Moretto & Paolo M. Panteghini & Sergio Vergalli, 2020. "Deferred taxation under default risk," Journal of Economics, Springer, vol. 129(1), pages 33-48, January.
    8. Chen-Yin Kuo, 2018. "Does Accounting Conservatism Reduce Default Risk? Evidence from Taiwan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(4), pages 227-242.
    9. Comincioli, Nicola & Vergalli, Sergio & Panteghini, Paolo M., "undated". "Business Tax Policy under Default Risk," ETA: Economic Theory and Applications 291520, Fondazione Eni Enrico Mattei (FEEM).
    10. Li, Wei-An & Du, Hanyu & He, Feng, 2025. "Mandatory corporate ESG disclosure and default risk – Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 89(C).
    11. Zeng, Jing & Dai, Fangjie & Chan, Kam C., 2023. "The impact of an accelerated depreciation tax policy on employment: Evidence from China," Journal of Asian Economics, Elsevier, vol. 86(C).

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    JEL classification:

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

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