Effects of Tax Depreciation on Optimal Firm Investment

CentER Discussion Paper Series No. 1999-58

Posted: 6 Aug 2000

See all articles by J. Wielhouwer

J. Wielhouwer

VU University Amsterdam

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

Date Written: 1999

Abstract

This paper studies how the difference between technical depreciation and tax depreciation affects the firm's optimal investment strategy. The objective is maximization of shareholder value. When tax depreciation differs from technical depreciation, an additional investment not only generates value due to the fact that the firm can produce more, but also due to the fact that an additional deferred tax liability arises. Two types of capital stock will therefore affect shareholder value, i.e. the replacement value of the assets and the tax base of the assets. We present a dynamic model of the firm with these two types of capital stock, and study the effects of the tax depreciation rate on the firm's optimal dynamic investment strategy, dividend policy, and long run capital stock level.

Keywords: Optimization, taxation, depreciation, investment, share valuation

JEL Classification: E22, G31, H25, C61

Suggested Citation

Wielhouwer, Jacco L. and Kort, Peter and De Waegenaere, Anja M.B., Effects of Tax Depreciation on Optimal Firm Investment (1999). CentER Discussion Paper Series No. 1999-58. Available at SSRN: https://ssrn.com/abstract=199735

Jacco L. Wielhouwer

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Peter Kort

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

Anja M.B. De Waegenaere (Contact Author)

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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