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Does the debt tax shield distort ownership efficiency?

Norbäck, Pehr Johan ; Persson, Lars LU and Tåg, Joacim LU (2018) In International Review of Economics and Finance 54. p.299-310
Abstract

The tax laws of most developed countries are debt biased since firms can deduct interest on debt but not on equity. This bias is known to distort investment decisions. However, less is known about how the debt tax shield affects the ownership of assets when bidders differ financial expertise and thus in optimal use of leverage. We show that the debt tax shield need not always distort ownership efficiency. Assets end up with the socially preferred owner when differences in financial and productive expertise between bidders is small and better financial expertise reduces expected bankruptcy costs.

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author
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Acquisitions, Capital gains tax, Corporate tax, LBOs, M&As, Ownership, Private equity, Tax shields, D20, G32, G33, G34, H25, H32, L19, L22
in
International Review of Economics and Finance
volume
54
pages
12 pages
external identifiers
  • scopus:85033408020
ISSN
1059-0560
DOI
10.1016/j.iref.2017.09.012
language
English
LU publication?
no
id
4c2f88da-387e-4265-a168-7c2dd2aee863
date added to LUP
2020-01-23 15:53:28
date last changed
2020-03-24 07:09:16
@article{4c2f88da-387e-4265-a168-7c2dd2aee863,
  abstract     = {<p>The tax laws of most developed countries are debt biased since firms can deduct interest on debt but not on equity. This bias is known to distort investment decisions. However, less is known about how the debt tax shield affects the ownership of assets when bidders differ financial expertise and thus in optimal use of leverage. We show that the debt tax shield need not always distort ownership efficiency. Assets end up with the socially preferred owner when differences in financial and productive expertise between bidders is small and better financial expertise reduces expected bankruptcy costs.</p>},
  author       = {Norbäck, Pehr Johan and Persson, Lars and Tåg, Joacim},
  issn         = {1059-0560},
  language     = {eng},
  month        = {03},
  pages        = {299--310},
  series       = {International Review of Economics and Finance},
  title        = {Does the debt tax shield distort ownership efficiency?},
  url          = {http://dx.doi.org/10.1016/j.iref.2017.09.012},
  doi          = {10.1016/j.iref.2017.09.012},
  volume       = {54},
  year         = {2018},
}