2018

Does the Debt Tax Shield Distort Ownership Efficiency?

Reprint No. 2018:11

Author(s): Pehr-Johan Norbäck, Lars Persson and Joacim TågYear: 2018 Title: International Review of Economics & Finance Volume (No.): 54 (March) Pages: 299–310
Online article (restrictions may apply)


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.


Reference:
Norbäck, Pehr-Johan, Lars Persson and Joacim Tåg (2018), "Does the Debt Tax Shield Distort Ownership Efficiency?". International Review of Economics & Finance 54(March), 299–310.

Pehr-Johan Norbäck

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Lars Persson

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Joacim Tåg

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joacim.tag@ifn.se

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