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Effects of tax depreciation on optimal firm investments
Wielhouwer,J.L. Kort,P.M. De Waegenaere,A.M.B.
Wielhouwer,J.L.
Kort,P.M.
De Waegenaere,A.M.B.
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 a defect 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.
Description
Pagination: 37
Date
1999
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Publisher
Accounting
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58.pdf
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Keywords
Tax depreciation, technical depreciation, deferred taxation, investments, shareholder value, dynamic optimization, C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis, E22 - Investment ; Capital ; Intangible Capital ; Capacity
Citation
Wielhouwer, J L, Kort, P M & De Waegenaere, A M B 1999 'Effects of tax depreciation on optimal firm investments' CentER Discussion Paper, vol. 1999-58, Accounting, Tilburg.