When Does The Debt Tax Shield Distort Ownership Efficiency?

19 Pages Posted: 13 Jun 2010 Last revised: 11 Mar 2017

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Joacim Tåg

Research Institute of Industrial Economics (IFN)

Date Written: March 11, 2017

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 is small and better financial expertise reduces expected bankruptcy costs.

Keywords: Acquisitions, Capital Gains Tax, Corporate Tax, LBOs, M&As, Ownership, Private Equity, Tax Shields

JEL Classification: D20, G32, G33, G34, H25, H32, L19, L22

Suggested Citation

Norbäck, Pehr-Johan and Persson, Lars and Tåg, Joacim, When Does The Debt Tax Shield Distort Ownership Efficiency? (March 11, 2017). Available at SSRN: https://ssrn.com/abstract=1623772 or http://dx.doi.org/10.2139/ssrn.1623772

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lars Persson (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Joacim Tåg

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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