Do financial frictions amplify fiscal policy? Evidence from business investment stimulus

Eric Zwick () and James Mahon
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Eric Zwick: University of Chicago Booth, School of Business

No 1415, Working Papers from Oxford University Centre for Business Taxation

Abstract: We estimate the effect of temporary tax incentives on equipment investment using shifts in accelerated depreciation. Analyzing data for over 120,000 firms, we present three findings. First, bonus depreciation raised investment 17.3 percent on average between 2001 and 2004 and 29.5 percent between 2008 and 2010. Second, financially constrained firms respond more than unconstrained firms. Third, firms respond strongly when the policy generates immediate cash flows but not when benefits only come in the future. Implied discount rates are too high to match a frictionless model and cannot be explained entirely by costly finance, unless firms neglect future financial constraints.

Date: 2014
New Economics Papers: this item is included in nep-mfd
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