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Does the Debt Tax Shield Distort Ownership Efficiency?

Pehr-Johan Norbäck (), Lars Persson and Joacim Tåg

No 841, Working Paper Series from Research Institute of Industrial Economics

Abstract: The tax laws of most developed countries are debt biased since firms can deduct interest on debt but not on equity. This bias is known to distort investment decisions. However, less is known about how the debt tax shield affects the ownership of assets when bidders differ financial expertise and thus in optimal use of leverage. We show that the debt tax shield need not always distort ownership efficiency. Assets end up with the socially preferred owner when differences in financial and productive expertise between bidders are small and better financial expertise reduces expected bankruptcy costs.

Keywords: Acquisitions; Capital Gains Tax; Corporate Tax; LBOs; Mergers and Acquisitions; Ownership; Private Equity; Tax Shields (search for similar items in EconPapers)
JEL-codes: D20 G32 G33 G34 H25 H32 L19 L22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc and nep-fmk
Date: 2010-06-11, Revised 2017-09-22
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Forthcoming as Norbäck, Pehr-Johan, Lars Persson and Joacim Tåg, 'Does the Debt Tax Shield Distort Ownership Efficiency?' in International Review of Economics and Finance, 2017.

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