Accelerated Depreciation, Default Risk and Investment Decisions
24 Pages Posted: 8 Mar 2016
There are 2 versions of this paper
Accelerated Depreciation, Default Risk and Investment Decisions
Date Written: March 7, 2016
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.
Keywords: Capital Structure, Contingent Claims, Corporate Taxation and Hybrid Securities
JEL Classification: H2
Suggested Citation: Suggested Citation