Accelerated depreciation, default risk and investment decisions

Paolo Panteghini and Sergio Vergalli

Journal of Economics, 2016, vol. 119, issue 2, No 3, 113-130

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.

Keywords: Capital structure; Contingent claims; Corporate taxation and investment (search for similar items in EconPapers)
JEL-codes: H2 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Accelerated Depreciation, Default Risk and Investment Decisions (2016)
Working Paper: Accelerated Depreciation, Default Risk and Investment Decisions (2016)
Working Paper: Accelerated Depreciation, Default Risk and Investment Decisions (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:119:y:2016:i:2:d:10.1007_s00712-016-0500-x

DOI: 10.1007/s00712-016-0500-x

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