Effects of tax depreciation on optimal firm investments

Research output: Working paperDiscussion paperOther research output

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherAccounting
Number of pages37
Volume1999-58
Publication statusPublished - 1999

Publication series

NameCentER Discussion Paper
Volume1999-58

Fingerprint

Firm investment
Tax
Depreciation
Capital stock
Shareholder value
Assets
Liability
Tax base
Defects
Investment strategy
Optimal investment strategy
Dividend policy
Deferred taxes
Replacement

Keywords

  • Tax depreciation
  • technical depreciation
  • deferred taxation
  • investments
  • shareholder value
  • dynamic optimization

Cite this

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). Tilburg: Accounting.
Wielhouwer, J.L. ; Kort, P.M. ; De Waegenaere, A.M.B. / Effects of tax depreciation on optimal firm investments. Tilburg : Accounting, 1999. (CentER Discussion Paper).
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Wielhouwer, JL, Kort, PM & De Waegenaere, AMB 1999 'Effects of tax depreciation on optimal firm investments' CentER Discussion Paper, vol. 1999-58, Accounting, Tilburg.

Effects of tax depreciation on optimal firm investments. / Wielhouwer, J.L.; Kort, P.M.; De Waegenaere, A.M.B.

Tilburg : Accounting, 1999. (CentER Discussion Paper; Vol. 1999-58).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

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AU - De Waegenaere, A.M.B.

N1 - Pagination: 37

PY - 1999

Y1 - 1999

N2 - 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.

AB - 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.

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Wielhouwer JL, Kort PM, De Waegenaere AMB. Effects of tax depreciation on optimal firm investments. Tilburg: Accounting. 1999. (CentER Discussion Paper).