Effects of tax depreciation on optimal firm investments

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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
Number of pages37
Publication statusPublished - 1999

Publication series

NameCentER Discussion Paper


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


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