Accelerated Depreciation, Default Risk and Investment Decisions

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.


Issue Date:
Mar 01 2016
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/232220
Total Pages:
24
JEL Codes:
H2
Series Statement:
ET
14.2016




 Record created 2017-04-01, last modified 2017-08-29

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