FEEM working papers "Note di lavoro" series
2016 .014

Accelerated Depreciation, Default Risk and Investment Decisions


Authors: Paolo M. Panteghini, Sergio Vergalli
Series: Economic Theory
Editor: Carlo Carraro
Keywords: Capital Structure, Contingent Claims, Corporate Taxation and Hybrid Securities
JEL n.: H2

Abstract

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.

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Suggested citation: Panteghini, P. M., S. Vergalli, (2016), 'Accelerated Depreciation, Default Risk and Investment Decisions',  Nota di Lavoro  14.2016, Milan, Italy: Fondazione Eni Enrico Mattei

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