Investment Distortions and the Value of the Government's Tax Claim

41 Pages Posted: 13 Jul 2009 Last revised: 3 Feb 2016

See all articles by Daniel Kreutzmann

Daniel Kreutzmann

University of Cologne

Soenke Sievers

Paderborn University

Christian Müller

University of Cologne

Date Written: July 13, 2009

Abstract

This study integrates the government in the context of company valuation. Our framework allows to analyze and to quantify the risk-sharing effects and conflicts of interest between the government and the shareholders when firms follow different financial policies. We provide novel evidence that firms with fixed future levels of debt might invest more than socially desirable. Economically, this happens if the gain in tax-shields is big enough to outweigh the loss in the unlevered firm value. Our findings have implications for the practice of investment subsidy programs provided by the government to avoid fostering investments beyond the socially optimal level.

Keywords: corporate tax claim, company valuation, optimal investment, cost of capital

JEL Classification: G31, G32, G38, H21, H25, H6

Suggested Citation

Kreutzmann, Daniel and Sievers, Soenke and Müller, Christian, Investment Distortions and the Value of the Government's Tax Claim (July 13, 2009). Applied Financial Economics, Vol. 23, No. 11, 2013. Available at SSRN: https://ssrn.com/abstract=1433277 or http://dx.doi.org/10.2139/ssrn.1433277

Daniel Kreutzmann

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Soenke Sievers (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

HOME PAGE: http://www.upb.de/accounting

Christian Müller

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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