Does Debt Maturity Matter for Investment Decisions?
In the conventional literature related to investment decisions, less attention has been paid to the length of maturity when investment is debt-financed. In such a case a firm pays the creditor not only the sum of annual interest (initial investment cost multiplied by real interest rate) for the entire borrowing years but also the total amount of initial investment cost at the end of the borrowing period. In this study, the effects of selecting different maturity years on firms’ investment decisions are compared on the basis of the simple net present value (NPV) model. Without taxation, the NPV is equal to the present value (PV) of future gross return less the PV of the cost of investment. An investment project is considered to be profitable when the NPV is positive. After the introduction of a corporate income tax, the PV of an asset amounts to the sum of PVs of net return (gross return less taxes) and tax savings led by an incentive depreciation provision. If the investment is debt-financed, the interest payment additionally reduces the corporate tax base. The research findings suggest that (1) ceteris paribus an optimum maturity year appears to exist that maximises the NVP, and (2) the change of optimum debt maturity tends to correlate positively with the corporate tax rate but negatively with the interest rate. In the case of prevailing inflation, there is a mismatch between the nominal interest rate that is a discounting factor for all observed in- and outflows and the real interest rate by which the annual interest payment is determined for the entire maturity period.
|Date of creation:||2004|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stohs, Mark Hoven & Mauer, David C, 1996. "The Determinants of Corporate Debt Maturity Structure," The Journal of Business, University of Chicago Press, vol. 69(3), pages 279-312, July.
- Aaron, Henry J, 1976. "Inflation and the Income Tax," American Economic Review, American Economic Association, vol. 66(2), pages 193-199, May.
- Chang Woon Nam & Doina Maria Radulescu, 2005.
"The Role of Tax Depreciation for Investment Decisions: A Comparison of European Transition Countries,"
Eastern European Economics,
M.E. Sharpe, Inc., vol. 43(5), pages 5-24, October.
- Chang Woon Nam & Doina Maria Radulescu, 2003. "The Role of Tax Depreciation for Investment Decisions: A Comparison of European Transition Countries," CESifo Working Paper Series 847, CESifo Group Munich.
- Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 733-771.
- Stewart C. Myers & Raghuram G. Rajan, 1995. "The Paradox of Liquidity," NBER Working Papers 5143, National Bureau of Economic Research, Inc.
- Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," CRSP working papers 339, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Martin Feldstein, 1979. "Adjusting Depreciation in an Inflationary Economy: Indexing versus Acceleration," NBER Working Papers 0395, National Bureau of Economic Research, Inc.
- Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72, pages 604-604.
- Kay, J A, 1977. "Inflation Accounting-A Review Article," Economic Journal, Royal Economic Society, vol. 87(346), pages 300-311, June.
- Flannery, Mark J, 1986. " Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March.
- Emery, Gary W, 2001. "Cyclical Demand and the Choice of Debt Maturity," The Journal of Business, University of Chicago Press, vol. 74(4), pages 557-590, October.
- Kane, Alex & Marcus, Alan J. & McDonald, Robert L., 1985. "Debt Policy and the Rate of Return Premium to Leverage," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 479-499, December.
- Alex Kane & Alan J. Marcus & Robert L. McDonald, 1984. "Debt Policy and the Rate of Return Premium to Leverage," NBER Working Papers 1439, National Bureau of Economic Research, Inc.
- Morris, James R, 1976. "On Corporate Debt Maturity Strategies," Journal of Finance, American Finance Association, vol. 31(1), pages 29-37, March.
- Brick, Ivan E & Ravid, S Abraham, 1985. " On the Relevance of Debt Maturity Structure," Journal of Finance, American Finance Association, vol. 40(5), pages 1423-1437, December.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
- Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
- Douglas W. Diamond, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 709-737.
- Goswami, Gautam & Noe, Thomas H & Rebello, Michael J, 1995. " Debt Financing under Asymmetric Information," Journal of Finance, American Finance Association, vol. 50(2), pages 633-659, June.
- Hans-Werner Sinn & Willi Leibfritz & Alfons J. Weichenrieder, 1999. "ifo Vorschlag zur Steuerreform," Ifo Schnelldienst, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 52(18), pages 03-18, October.
- Titman, Sheridan, 1992. " Interest Rate Swaps and Corporate Financing Choices," Journal of Finance, American Finance Association, vol. 47(4), pages 1503-1516, September.
- Sheridan Titman, 1990. "Interest rate swaps and corporate financing choices," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
- Aydin Ozkan, 2000. "An empirical analysis of corporate debt maturity structure," European Financial Management, European Financial Management Association, vol. 6(2), pages 197-212.
- Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
- 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)
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_1124. 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: (Klaus Wohlrabe)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.