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.
International Review of Economics & Finance
Does the Debt Tax Shield Distort Ownership Efficiency?