Accelerated Depreciation, Default Risk and Investment Decisions
22 Pages Posted: 24 Feb 2016
Date Written: January 20, 2016
In this article we focus on a representative firm that can decide when to invest under default risk. On the one hand, this firm can benefit from generous tax depreciation allowances, on the other hand it faces a default risk. Our aim is to study the effects of tax depreciation allowances in a risky environment. As will be shown in our numerical analysis, generous tax depreciation allowances lead to a decrease in a firm’s leverage and, in most cases, cause a reduction in default risk. This result has a strong policy implication, in that it shows that an investment stimulus pack is expected neither to increase the default risk nor to cause financial instability.
Keywords: capital structure, contingent claims, corporate taxation and hybrid securities
JEL Classification: H200
Suggested Citation: Suggested Citation